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POLITIC 





UNIVERSITY 
OF FLORIDA 
LIBRARIES 







Digitized by the Internet Archive 
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http://archive.org/details/economicsofpolitOOharr 



THE ECONOMICS OF THE 
POLITICAL PARTIES 



THE MACMILLAN COMPANY 

new york • chicago 

dallas • atlanta . san francisco 

london • manila 

In Canada 

BRETT-MACMILLAN LTD. 

GALT, ONTARIO 



THE ECONOMICS OF THE 
POLITICAL PARTIES 



With Special Attention to Presidents Eisenhower and Kennedy 



Seymour E. Harris 



New York The Macmillan Company 1962 
A Division of The Cro well- Collier Publishing Company 



© Seymour E. Harris 1962 

All rights reserved — no part of this book may be reproduced in any 
form without permission in writing from the publisher, except by a 
reviewer who wishes to quote brief passages in connection with a 
review written for inclusion in magazine or newspaper. 

The Macmillan Company, New York 
Brett-Macmillan Ltd., Gait, Ontario 

First Printing 
Printed in the United States of America 

Library of Congress catalog card number: 62-11923 






For Arthur M. Schlesinger, Jr. 
and John Kenneth Galbraith 



PREFATORY NOTE 



^i I have tried to write an objective book; but I doubt that I have 
succeeded. It is very difficult to write a book that would generally 
be considered objective, when the issues are ideological as well as 
economic. 

This is a book about the economics of parties and especially of 
two leaders of the major parties — Presidents Eisenhower and 
Kennedy. 

My sympathies over the years have been with the Democratic 
party. In 1952, I was fearful that an administration that would oper- 
ate on the economic and ideological principles enunciated in the 
1952 campaign would wreck our economy and destroy our welfare 
programs. But this has not happened. In fact, the years 1952-1960 
were on the whole prosperous years. Indeed the administration 
might have done better. They frequently failed to keep promises, 
lapses which sometimes could be explained by extenuating circum- 
stances, and they made no breakthrough in the whole welfare area. 

My interest in political economy goes back many years. For 
forty years as a teacher at Harvard, I have studied, taught and 
written about issues of public policy. I am not one of the model 
builders who stray far from the presentations that might help the 
policy makers. 

On many issues I have taken sides. To many potential critics I 
can only say that professors have the same right to value judgments as 
other citizens. I make only one reservation. A great university must 
not be monolithic: all important kinds of economics and ideologies 
should be available to the student for him to choose. 

Much of what I have learned about the problems studied in this 
book stems from work done as an expert for Congressional com- 

vii 



] 



Viii }0. PREFATORY NOTE 

mittees — I served as an expert witness on an average about five 
times a year in the 1950's. I have had the privilege of working with 
Governor Stevenson in his Presidential campaigns and in his un- 
precedented one- to two-day seminars in 1954 and 1955. I have also 
served as an advisor to President Kennedy and as a member of his 
task force on the economy. For these privileges I am grateful, as I 
am for the opportunity to serve as advisor to the New England 
governors and as a member of three committees of the Democratic 
Advisory Council (chairman of one). Over the years I have also 
served as a consultant to a dozen federal departments and agencies. 
At present I am the senior consultant to Secretary of the Treasury 
Dillon, to the Council of Economic Advisors, a member of the 
National Academy of Sciences — National Research Council Com- 
mittee on Textile Research, and a member of the Public Advisory 
Committee on the Area Development Program. So much for my 
credentials. 

I am indebted to Mrs. Eliot Nolen and Miss Beatrice Merrick 
for typing an early version of this manuscript, and to Mrs. Eliza- 
beth May for her careful typing of the latest version. The late Mrs. 
Anna Thorpe and Miss Mary Watson, my secretaries, cheerfully 
helped in many ways. Alan Leftkovitz (Harvard Law School, 1959) 
served as a research assistant. My able student, Richard Cooper 
(now of the President's Economic Council), read the manuscript 
and improved it greatly. Mrs. David Humez edited an early version. 
I have obligations also to Charles Tyroler, the able Executive Direc- 
tor of the Democratic Advisory Council, Joseph Baird of the Baird 
Chemical Company, and Samuel Brightman of the Democratic 
National Committee. The Republican National Committee also 
kindly sent me some material. My friend and colleague, Arthur M. 
Schlesinger, Jr., read an early version of this manuscript and some 
later revisions. He greatly improved the manuscript. My greatest 
thanks should go to my wife who put up with me in the summer 
of 1961, when finishing this book in the midst of other responsibilities 
and under difficult conditions made me even more irritable than 
usual. 

In a book of this kind, it is more important than usual for the 
author to assume full responsibility for the contents. 

Seymour E. Harris 
Cambridge, Massachusetts 
December, 1961 



CONTENTS 



Prefatory Note vii 

Introduction: the major issues xv 

Part 1. CREED 1 

2. The ideology of the parties 3 

President Eisenhower's Advisors. The Ideology of Governor 
Stevenson. Words and Deeds. Executive Leadership. Conclu- 
sion. 

2. Those in control 20 

The Major Eisenhower Appointees. The Roosevelt Appoint- 
ments in the Early Years. 

3. Appointments under Kennedy 25 

4. The tie-in with big business 33 

Big Business in Control. Big Business and Small Business. 
Corruption. Conclusion. 

5. The little man and the big interests 43 

Growth and Instability of the Currency. Distribution of In- 
come. Eisenhower's Policies Do Not Favor Low-Income 
Groups. Labor Legislation. Conclusion. 

6. The Kennedy creed and that of his opponents 50 

Kennedy's General Position. The Nixon Creed. A Republican 
Deviator. Another Republican Deviator: Nelson Rockefeller. 
Summary. 

7. Platforms and achievements 62 



X ]0 CONTENTS 

Part II. ECONOMICS AND VOTES 71 

8. Political aspects of economic policy 73 

Unemployment and Election Returns. Some Thoughts for the 
Future. Summary. 

Part HE MONEY 83 

Introduction 83 

9. Inflation 85 

Eisenhower on Inflation. Stevenson on Inflation. The Failure 
of the Democrats to Answer Republican Charges. The History 
of Prices. Summary. 

10. What causes inflation 90 

11. The failure of monetary policy 93 

Eisenhower on Monetary Policy. Responsibilities of the Fed- 
eral Reserve for the Recession in 1957-1958. Failure to Stop 
Monetary Expansion. The Financial Intermediaries. Failure 
to Use Weapons. Policy, Ideology and Uneven Incidence of 
Dear Money. Whose Recession? 

12. Money and interest rates: some history 100 

Stability Versus Growth. Democratic Monetary Policy. Re- 
cent Trends in Money and Other Variables. 

13. Some issues raised by the independence of the 

Federal Reserve 106 

The Central Problem. The Independence Myth. Independ- 
ence or Integration? Independence and the Inadequacies of 
Policies. Independence and Conflict of Agencies. The Na- 
tional Economic Council. Conclusion. 

14: Kennedy on money and the rate of interest 114 

The Troublesome Problems Confronting the President. The 
Monetary Situation. Difficulties Encountered by Kennedy in 
Pursuing an Easy-Money Policy. The Problem of Mr. Martin. 
Achievements. Conclusion. 



Contents %% 

Part IV. BUDGET AND FISCAL POLICY 127 

15: The budget 129 

Budgetary Views. Later Views. The Democratic Viewpoint. 
Relevant Aspects of Government Spending. Economies. 
Bankruptcy? Public Versus Private Outlays. A Spending 
Philosophy. The Issue of Cutting Taxes or Increasing Spend- 
ing. Summary. 

16. Misleading budgets 141 

17. Tax and fiscal policy 145 

Introduction. Taxes and the Economy. Taxes and Invest- 
ment. Issues of Equity. Conflicts of Economics and Ideologies 
and Tax Structure. The 1954 Tax Reduction Bill. 

18. Failure of debt management 158 

Introduction. The Size of the Debt. Anticyclical Debt Policy. 
Money and Debt Management. Responsibility for Rates. 
Debt Management as a Means of Raising Interest Rates. 
Short-Term Debt. The Rate on Government Borrowing. Con- 
sultation on Treasury Financing Problems. The Govern- 
ment Security Market. 

19. The budget and defense 169 

Excessive Weight on Budgetary Considerations. Our In- 
secure Position. Information and Debate. How Much De- 
fense Can We Afford? Conclusion. 

20. Kennedy on fiscal policy 178 

Nixon's Views on Spending. Kennedy's Views. The Admin- 
istration on Fiscal Policy. The Policies of the Kennedy Ad- 
ministration. Special Aspects of Fiscal Policy. Conclusions. 

Part V. RECESSION, GROWTH AND UNEMPLOYMENT 201 

21. Republican treatment of recessions 203 

Causes of the 1957-1958 Recession. How to Deal with the 
Recession. The Author's Views on the Treatment of the 
Recession. Conclusion. 

22. Growth 212 

The Arithmetic of Growth. Determinants. Growth Versus 
Price Stability. Positive Goals for Growth. Other Factors. 



XU }0 CONTENTS 

23. Kennedy and his opponents on growth 222 

Republican Views. Kennedy on Growth. Growth and Re- 
cession. 

24. Kennedy on unemployment 229 



Part VI. WELFARE 237 

25. Welfare programs 239 

Trends. Breakthroughs in the Eisenhower Administration? 
Promises and Performances. Stevenson on Welfare. Welfare 
Issues Between the Democrats and the Republicans. 

26. The old 251 

Contrast of Views. Some Unresolved Problems. Conclusion. 

27. Federal aid for education 256 

The Crisis in Education. The Eisenhower Program in Edu- 
cation. Conclusion. 

28. Medicine 264 

The Rise in Medical Outlays Has Been Disappointing. Public 
Expenditures on Medicine. More Money for Medicine. More 
Outlays on Medicine and Insurance. Matching Additional 
Spending with an Increased Flow of Resources. Insurance 
and Improved Distribution. The Eisenhower Program in 
Medicine. Conclusion. 

29. Unemployment and disability insurance 274 

Introduction. What Is Wrong with the Unemployment Com- 
pensation Program? Disability Insurance. Responsibilities of 
the Eisenhower Administration for Unemployment and Dis- 
ability Insurance. 

30. Housing and urban redevelopment 281 

Conclusions. 

31. Depressed areas 286 

Conclusion. 

32. Kennedy on welfare 291 

Early Differences. Principles of Welfare Legislation. The 
Advances of Kennedy. Republican Attitudes in 1961. 



Contents xiii 

Part VII. USE OF RESOURCES 301 

33. Natural resources 303 

Introduction. The TVA. Hell's Canyon. The Upper Colorado 
River. Other Aspects of Resource Policy. Concluding Re- 
marks. 

34. Agricultural policy 314 

Eisenhower's Promises. Achievements. The Clash of Parties 
on Agricultural Policies. Summary. 

35. Kennedys farm policies 319 

Kennedy's Appraisal of Republican Policies. 

Part VIII. EXTERNAL ASPECTS 323 

36. International economics 325 

Criticisms of the Eisenhower Program. 

37. Kennedy on international economics 330 

The Dollar Problem. Foreign Aid. Trade Policy. 

Part IX. CONCLUSIONS 339 

38. Conclusion: the conflict of parties 341 

The Battle of the 1960's. 

Notes 351 

Abbreviations Used in Notes. 
Index 375 



Introduction: the major issues 



i. 

^f Government has a large and increasing role to play in the life of 
the nation. This is fundamental to our well-being and even our sur- 
vival. How otherwise could we have contended with the Great De- 
pression in the thirties; the communist threat in the postwar era; the 
disruptions caused by automation; the gradual increase in our aging 
population; the need to divert resources to the public sector for re- 
search, health, education, resource development (and incidentally 
for growth); for compulsory insurance for old age and health, for 
treatment of unemployment? 

My disagreements with the Eisenhower administration and its 
aftermath stem primarily from a difference in value judgments but 
also from disagreement on economic analyses. The Republicans 
write down the use of fiscal policy — for ideological reasons. Fiscal 
policy means more government intervention: the use of taxation, 
public expenditures and debt policy to stabilize and stimulate the 
economy. Proper use of fiscal policy contributes to stabilization and 
growth. When George Humphrey, the Secretary of the Treasury, 
threatened to resign if deficit spending were used to treat a recession, 
he raised not only an ideological, but also an economic issue. Most 
economists would argue that fiscal treatment of a recession adds to, 
rather than detracts from, output and hence to economic well-being. 

The importance of the ideological difference is suggested by the 
following: In 1952 Federal Government purchases of goods and 
services were $52.9 billion; in 1960, $52.3 billion. Yet the nations 
gross national product had risen by $156 billion in this period. 
Federal drains on the nation's output had declined from 15 to 10 per 

xv 



xvi ^t introduction: the major issues 

cent, and this in a period of growing international tensions. Repub- 
lican policy was to spare the taxpayers and contain spending for 
welfare. 

But Democratic policy, as repeatedly announced first by Steven- 
son and then by Kennedy, was to provide additional services out of 
rising national income, and if possible, then tax relief. Opposition of 
Republicans to government did not extend to activities of state and 
local government, for in this period of eight years they acquiesced 
and even encouraged a rise of purchases of goods and services by 
these governments from $23 to $46 billion. Nor was the Eisenhower 
administration so hostile to welfare programs financed by the re- 
cipients. This is evident in the very large rise of cash payments, an 
increase explained largely by payments under various insurance 
programs — in part the result of earlier legislation and in part of 
liberalization supported by Eisenhower — from $77 billion in fiscal 
year (F.Y. ) 1953 to $98 billion in 1961. 

At the very end of the Eisenhower administration — in fact two 
days before the new administration took over — the able Director of 
the Budget, Maurice Stans, sent along a staff report to the President 1 
in which he estimated the rise of expenditures by 1970 under three 
sets of assumptions: low, medium and high. I would associate the 
low with Humphrey or Goldwater policies, the medium with Eisen- 
hower policies, and the high with Republican interpretation of 
democratic policies. What Stans was really driving at was that large 
tax savings would be available by 1970 if the Federal Government 
were cautious in embarking on new operations or extensions of old 
ones. At a projected gross national product of $750 billion by 1970, 
the tax revenue would undoubtedly increase by about $40-$45 bil- 
lion. As compared to actual budgetary expenditures of $77.2 billion 
in F.Y. 1960, the low, medium and high projections yield expendi- 
tures of $83.9, $97.4 and $122.6 billion respectively by 1970. Ob- 
viously a Hoover-like policy could yield tax savings of $39 billion 
per year by 1970. (The assumption is, however, that gross national 
product (GNP) would not be affected by the magnitude of public 
spending. ) 

I do not mean to imply that the arguments for increased govern- 
mental operation are all on one side. In another able paper, released 
by the Director of the Budget just before the Kennedy administra- 
tion took over, 2 he revealed obstacles to effective fiscal policy. 

One difficulty is that the corrective action taken tends to affect 



Introduction: the major issues xvii 

the economy too late. Thus the excess of cash payments in F.Y. 1958 
was $4.4 billion and in F.Y. 1959 $13.7 billion, but the recession 
ended in F.Y. 1958, we are told, and hence, it is held that large 
deficits were incurred without contributing to the therapy. 

A second point is that of the excess of payments of $13.7 billion, 
almost one-half is associated, not with expenditures undertaken for 
this purpose, but outlays that resulted from other policies — for ex- 
ample, rise in agricultural payments under existing legislation, 
promised rise of pay for civilian employees; and the planned legis- 
lative expenditures, part of an antirecession program, contributed 
only $100 million in F.Y. 1958 and $1.4 billion in F.Y. 1959. More- 
over, additional federal outlays are to some extent substitutes for 
private outlays — for example, mortgages purchased by the Federal 
National Mortgage Association in part absorb mortgages that would 
otherwise be purchased by private interests. 

Third, the policy of treating a recession through expenditures 
that are not reversible, that is, cannot be cut off once recovery is 
here, may be very costly indeed. 

Since I treat Eisenhower's antirecession policies fully later, I 
shall be brief here. Stans's position on the difficulty of spending at 
the right time has substance. For this reason I was critical of the 
public works spending proposed by some in the early months of the 
Kennedy administration. What is needed here is better preparation 
for essential public investments. On the issue of irreversibility, it is 
of some significance that Stans concludes that most countercyclical 
policies of 1958-1959 were reversible. 

On the issue of wastage of deficits, I am not so certain as the 
Eisenhower administration was, for unemployment averaged 3.1 
per cent in the second half of 1957, but 6.8 and 7.0 per cent in the 
first and second half of 1958, and 5.5 per cent in the first half of 1959. 
Hence an average of 6.25 per cent unemployment in F.Y. 1959 does 
not exactly spell recovery; and the deficits were not wasted, for they 
contributed to keeping demand high and unemployment down. 

Two final points require comment. A tax cut would have had 
quick effects and particularly a reversible tax cut such as was sug- 
gested by Kennedy's Council in 1961. (The case was not so strong 
for a tax cut in 1961 as in 1958 because the recession was less ro- 
bust. ) Finally even Stans admits that built-in stability is very im- 
portant — and this is crucial for fiscal policy. Automatic declines in 
revenue ($4.6 billion) and automatic increases in unemployment 



xmn ^ introduction: the major issues 

benefits ($1.7 billion) were crucial in F.Y. 1958. They both stimu- 
lated spending. 

2. 

According to close associates, Eisenhower liked to reminisce of 
the old days when only the Chief of Staff had a car and all others 
who had to travel received an appropriate number of streetcar 
tokens. This in a general way sums up one aspect of the Republican 
ideology, namely: spending is bad, and particularly by government; 
thrift is good. There is no recognition of the fact that savings, how- 
ever useful to the individual, may be excessive at times and hence 
costly to the economy; and no or little recognition of the fact that a 
dollar spent by government may be as productive, if not more so, 
than the dollar spent by an individual. John Stuart Mill, the great 
classicist, recognized this more than a hundred years ago. What 
dollars are more productive than the $50 billion spent for National 
Security or the $20 billion spent for public education? 

In short, the Keynesian Revolution by-passed the molders of 
policy of the Republican party who do not seem to realize that inter- 
vention of the government at the appropriate time — to increase pub- 
lic spending when private spending is deficient and to reduce it when 
private is excessive — contributes toward the salvation of the private- 
enterprise system. The Republican leaders insist that a dollar spent 
by the government is somehow a wasted dollar. As we shall see, 
Nixon made the point time and again in the 1960 campaign. Ran- 
dolph Burgess, Under Secretary of the Treasury under Eisenhower, 
and one of the chief producers of Republican ideology, put it as 
follows : 

. . . when the government spends money, it does not produce goods 
which the people can buy. 

Government debt is not productive; therefore, it is the worst kind of 
! debt. 3 

^ 3. 

Republican hostility to modern fiscal theories was costly in votes, 
as well as in economic well-being. A rapid changeover from a 
federal deficit to surplus, that is, from the Treasury stimulating the 
economy to depressing it, the most rapid rise of interest rates in one- 
hundred years of observed history, and the failure to treat this re- 



Introduction: the major issues xix 

cession in time, contributed to a 1 percentage point rise of unem- 
ployment in 1960 (the excess over a 4 per cent tolerable maximum 
averaged 1% per cent in the years 1957-1960). 

In fact, in three successive cyclical rises, from 1948 to 1960, the 
economic gains continued for 45, 35 and 25 months. The early end- 
ing of the upward phase in 1958-1960 can be associated with unwise 
fiscal and monetary policies. 

This was an important matter in the election of 1960 for at least 
eight states with 151 electoral votes, or 56 per cent of the votes re- 
quired to win. In two — Illinois and New Jersey — the amount of un- 
employment was twenty -two and eight times as high as the plurality 
received by the Democrats (32,000 plurality for the two states). Is 
there any doubt that an adequate high employment policy would 
have turned these two states, and hence the election, over to the 
Republicans? It is not surprising, then, that Vice-President Nixon 
apparently pressed the Federal Reserve in early 1960 to expand 
monetary supplies as a means of stimulating employment — though 
in the campaign he was most critical of easy money policies of the 
Democrats. 

If rising unemployment may have cost Mr. Nixon the Presidency, 
a continuance of unemployment at the current ( 1961 ) level of 7 per 
cent or even at 5-6 per cent may cost the Democrats the elections in 
1964. Unemployment in 1961 was the Republican responsibility; 
but not so in 1962-1964. This consideration is all the more important 
since a weighting of the trends in population by age, in the structure 
of employments, and in the exodus from the large cities, points to 
larger losses for the Democrats than the likely gains related to rising 
Catholic and Negro votes. 

4. 

How does one gauge the Republican position? We judge it not 
only through statements — that is, platforms, speeches— but also 
through legislative proposals and the follow-up. For the period 1952r- 
1960, the views and legislative proposals of the President are para- 
mount. But divergencies between his views and those of Congres- 
sional members of his party are also germane. For the 1960's, the 
ideas of Nixon, Rockefeller and Goldwater and the 1960 platform are 
also relevant. Clearly the official position could not deviate too much 
from the record of the 1950's. But the differences between Republi- 
can and Democratic economics seem to have narrowed in 1960. 




XX ^i introduction: the major issues 

This is partly the result of the pressures from Governor Nelson 
Rockefeller, and partly the fact that any party out of power tends 
to assume a more advanced position than it entertains when in 

ver, or when likely to assume power. 

Two statements in the summer of 1961 reveal the extent to which 
differences in the parties still persist. First, a criticism by Arthur 
Burns, a spokesman for the liberal wing of the Republican party. 
He is very critical of spending policies, comparing them to the ex- 
cesses of 1958. Here again is the usual exaggerated fear of inflation 
and of the spending to be incurred, the usual warning that the result 
will be continued imbalance in the dollar market and even devalua- 
tion. But in comparing 1958 and 1961, Burns is silent on the point 
that defense accounts for the major rise in 1961 and did not in 1958; 
he exaggerates the effects of this spending program on the external 
value of the dollar; he leaves out of account what is relevant, the 
relative decline of prices in the United States vis-a-vis her competi- 
tors in 1961; and in concentrating on cash payments, he inflates the 
relevant expenditures, for cash payments have been rising much 
more than budgetary expenditures, and the rising excess of cash 
outlays reflects largely expenditures balanced by payroll taxes. 
Finally, he does not allow for the excess capacity, the large unem- 
ployment, the rising productivity of the first year of recovery — all 
anti-inflationary factors. 

The second document reflecting the views of the Republican 
members of Congress is a supposed digest of papers of twenty-four 
experts (the Curtis Report). In this report, the stress is on private 
enterprise, private incentives, minimization of the activities of the 
Federal Government, increased tax concessions to business, the 
large contributions of wage policy to inflation (price policy is 
scarcely mentioned ) , the superb contribution of the Federal Reserve 
in the fight against inflation (nothing is said of this fight waged 
against expansion in recession periods ) , the concentration on struc- 
tural unemployment (not a word about what anticyclical fiscal 
policy might do to reduce structural unemployment). A few quo- 
tations suggest the thrust of this 30,000 word report. 

A planned economy only hides unemployment . . . individual drive 
and incentive supported by sound governmental policies are the only 
sensible answers to the changing job situation. 

Government's contribution is mainly not its own expenditures, but by 



Introduction: the major issues xxi 

promoting conditions "favorable to exercise of individual enterprise and 
private effort." 

The Federal Government is an "ancillary handmaiden rather than a 
partner in working together with business, farmers, labor, and state and 
local government." 4 

Although the report affirms that Republican members of Con- 
gress will not admit that "any substantial numbers of Americans 
should be idled against their will," and though the staff report an- 
nounces a general readiness in principle to engage in such a policy 
[fiscal] which extends to the leading figures in both political parties 
. . . 9 " there is little concrete evidence of a genuine desire to use 
fiscal policy or take other governmental action on a required level 
to deal with unemployment — except direct attacks, not fiscal policy, 
on structural unemployment. 

Some of the reports by the experts are almost beyond belief. 
Louis Kelso tells us that capital creates most, labor little; that our 
distribution system is like "that dictated by communist theory," that 
workers are paid for attendance, not for what they produce. 

Nixon's views have not been consistent. His ideological state- 
ments in the campaign were in the Republican tradition; but on 
many specific issues he outpromised the Democratic candidate. By 
1961, Eisenhower, Nixon and Republican congressmen once more 
embarked on a campaign against the "Democratic spenders and 
inflationists," entirely consistent with the Republican position in the 
1950s. 

In the course of this volume, I criticize the Republican adminis- 
tration for not performing according to promises made — measuring 
performance on the basis of proposed legislation, enactments and 
administration. In the Eisenhower administration an important ex- 
tenuating circumstance was the presence generally of a hostile 
Congress. But for a President with Eisenhower's theory of the 
Presidency — the acceptance of the decisions arrived at by subordi- 
nates without Presidential participation in the discussions, a reluc- 
tance to press the Congress, the emphasis on the veto threat rather 
than positive programs — the failure to achieve legislation could not 
have been a painful blow. 

For Kennedy, the platform seems a document to be taken 
seriously. In the first seven months of his administration, I count at 
least 38 major accomplishments, all justified by platform promises; 



xxii }£L introduction: the major issues 

and I find no substantive proposals at variance with the platform. 

But Kennedy has his problems: of the 262 Democratic represen- 
tatives elected in 1960, 102 come from the deep South, with at least 
one-half hostile to the President on domestic issues. The desertion 
of 51 members means a pro vote of 211 and an anti vote of 226. It is 
well to remember that platforms reflect the views of the President 
more than those of the Congress. This is well supported by the vote 
of August 30, 1961, on the emaciated educational bill. For the bill 
were 164 Democrats and 6 Republicans; against, 82 Democrats and 
160 Republicans. Of the opposition of 82, 77 were Democrats in the 
South. 

These were not the only troubles confronting President Kennedy 
in his first year. The dollar crisis, the steady rise of structural un- 
employment in successive business cycles, and the deterioration of 
our security position greatly hamper the use of effective fiscal and 
monetary weapons and slow the advance of welfare legislation. 



Perhaps there is no better indication of the position of the parties 
than the men Presidents choose to help formulate and administer 
programs. In Chapters 2 and 3,1 compare the top personnel of 
Eisenhower and Roosevelt and also of Eisenhower and Kennedy. In 
this summary statement, I limit myself to the latter comparison of 
199 early high-level appointments by Kennedy and 180 by Eisen- 
hower. 

Kennedy relied 1% times as much on men formerly in govern- 
ment, 3 times as much on academicians, and % as much on business- 
men. In two other aspects, Kennedy's appointments are to be dis- 
tinguished from Eisenhower's. The New York Times noted at the 
time of the death of General Bedell Smith 5 that the general was the 
only high official carried over by Eisenhower from the Truman ad- 
ministration. Of 220 high Eisenhower officials, 58 in late June, 1961, 
were still in the Kennedy administration. 6 Finally, no less than 18 
of Kennedy's high appointments were from the Hill. 

What does all of this mean? The dependence on academicians 
and government for enlistment of talent means that Kennedy is 
determined to seek help where conflicts of interest are likely to be a 
minimum. The heavy reliance on college professors points to a pro- 
egg-head attitude as against Eisenhower's anti-egg-head tendencies. 
In seeking businessmen above all others, Eisenhower revealed that 



Introduction: the major issues xxiii 

he had the greatest faith in the practical, and little faith in the idea 
men. The conservative party tends to be scornful of new ideas, often 
the prelude to new approaches to government activity and manage- 
ment. This was evident in the Eisenhower administration by 1953. 
Administration leaders discouraged the use of staff. They discouraged 
ideas from the staff. Even when highly technical issues like terms 
of debt issues were under consideration, the top officials tended to 
by-pass the advice of the experts. 

Kennedy retained many holdovers from the Eisenhower admin- 
istration, reflecting a determination, as he had promised in the cam- 
paign, to find the best men possible, irrespective of party. Hunting 
for talent in Congressional sources signified this same trait as well 
as the expectation that those who worked on the Hill would be 
especially helpful in working with Congress for the executive. 

6. 

The Democrats represent the little man; the Republicans, the 
more affluent members of society. I will submit two points in sup- 
port of this position here, and many others later. 

First, consider the weighting of objectives. For the Republicans, 
the number one goal is price stability, an "honest dollar." The Demo- 
crats, also in quest of price stability, seek first full employment and 
growth. In a way, the Republican stress on anti-inflationary policy 
is not to be expected, since they represent business primarily, and 
profits especially respond to inflation. The Republican party, it 
would seem, is against government spending, deficits and activity, 
and not against inflation per se. By stressing the inflationary effects 
of deficits they try to enlist the masses of consumers on their side 
against government. 

In seeking full employment and growth, the Democrats side 
with the little man; for unemployment means a concentration of 
misery on the weakest members of our society. Inadequate growth 
is a major explanation of unemployment. The economy must expand 
annually by 1 to 2 per cent to absorb the new workers (net) and 
about 2 per cent additional to offset the rising productivity of the 
economy. If, in 1962, 68 million workers can produce what 70 mil- 
lion workers did in 1961, then output must rise sufficiently to absorb 
the 2 million workers displaced by increasing productivity. The 
wastage of resources results from rising unemployment, much excess 
capacity, abandonment by millions of the labor market under un- 



xxtv }£L introduction: the major issues 

satisfactory employment conditions and reduction of hours of work. 7 

Second, consider the source of financial strength for the parties. 
The major contributors for the Republicans, as we shall see, are big 
business; for the Democrats, the worker. What led President Eisen- 
hower finally to accept Sherman Adams's resignation was the threat 
of large contributors to the Republican campaign chests to withhold 
their donations. 8 

Even more telling is a comparison of voting strength in the 
central core cities, where incomes are relatively low, and in the 
suburban areas where incomes are relatively high. To give one ex- 
ample: in New York City the Presidential vote in 1960 was 37.2 per 
cent Republican; in Nassau and Westchester counties, 55.2 and 56.7 
per cent respectively. In 40 cities with populations over 300,000, 
the Republicans received 5,974,000 votes and the Democrats 8,716,- 
000, or 40.7 and 59.3 per cent respectively. In 37 suburban areas, the 
Republicans received 4,410,000 votes and the Democrats 4,230,000, 
or 51 and 49 per cent respectively. The Republican record was much 
better relatively in the suburban areas in 1960, and even more so in 
1956. In 7 major states with 160 electoral votes, the Democratic big- 
city plurality in 1960 was 2,260,000; the Republican outstate plural- 
ity, 1,564,000. 9 

Not only recently, but for generations the Democratic party has 
been the defender of the little man. Theodore White, in his valuable 
book on The Making of the President, 1960, is overgenerous when 
he writes that: "Now that the Democrats have captured the liberal 
imagination of the nation, it is forgotten how much of the archi- 
tecture of the liberal society was drafted by the Republicans/' 10 
He then comments on the party's contributions — for example, aboli- 
tion of slavery, the first Civil Service law, conservation, first anti- 
trust legislation. 

In a 1961 statement before the Joint Economic Committee, 
Herbert Stein, Director of Research of the Committee on Economic 
Development said: 

. . . There is a tendency for both Republicans and Democrats to deny 
that Republicans have ever learned anything, and for both Democrats 
and Republicans to deny that Democrats have learned anything. But the 
fact is that both have learned a great deal since 1930 or 1950. . . . u 

There is some truth in both these statements. But one must also 
not forget that the Republican party in the years beween the Civil 



Introduction: the major issues xxv 

War and the present has continued to be the party of big business; 
the party that was responsible for the most flagrant periods of cor- 
ruption in government (for example, under the Grant and Harding 
administrations), the party of high protectionism, of rigid adherence 
to gold, of antigovernment, the party that paid off two-thirds of its 
Civil War debt in 24 years and thus restricted the supply of money 
and squeezed the debtor class in the "deflationary" '80's and Ws. 
(The modern economist would side with monetary expansionists 
[for example, Bryan] much more than economists of an earlier 
vintage.) In the more recent period, the Republicans indeed have 
learned something about modern theories of economics. But it is 
not true that they as a rule have been anxious to' learn or that they 
have learned as much as the Democrats — and some Democrats hav.e 
much to learn. 

7. 

As little government as possible is the most important principle 
of the Republican party. As Nixon expressed the point in the cam- 
paign: 

We say that the way to progress in America, the best way, the proved 
way, the way to go forward into a bright new future, is not through ex- 
panding the size and functions of government, but by increasing the op- 
portunities for millions of Americans. . . . 12 

From this fundamental principle follows much of Republican 
policy. Thus we explain the emphasis on monetary rather than fiscal 
policy; for the former means less "trespassing" by government. Thus 
we account for the independence of the Federal Reserve, for inde- 
pendence means that the Federal Reserve, irrespective of the 
objectives of government, can itself decide if and how it is to bring 
interest rates down. The extent to which this absurd theory of inde- 
pendence was carried, as Eisenhower repeatedly proclaimed the 
independence of the Federal Reserve, is suggested by the following 
exchange in 1961 between Senator Bush and Mr. Martin, the astute 
Chairman of the Federal Reserve Board. Senator Bush had brought 
to Martins attention a statement of President Kennedy's: 

The full financial influence of the government must continue to be 
exerted in the general direction of general credit ease and further mone- 
tary growth while the economy is recovering. 



xxvi ^i introduction: the major issues 

In reply to the senator's request for a comment, Mr. Martin said: 

In the first place, the Open Market Committee and the Federal Re- 
serve will carefully consider anything that the President of the United 
States says at any time, and we welcome his views. 

In other words, in the midst of the greatest crisis that ever con- 
fronted this country, the head of our monetary system informs the 
President, not that he will do everything possible to bring the rate 
of interest down, as proposed by the President, and integrate his 
policies with those of other agencies in a direct attack on the reces- 
sion, but rather that he will consider the President's views — as he 
already had announced he would consider views of others. 13 It is 
not surprising then that, according to the able New York Times re- 
porter Edwin Dale, central bankers in Europe were blackmailing 
the Democratic candidate in the summer of 1960 with threats of 
withdrawal of gold if the President fired Martin. 

The excessive fear of government explains many other features 
of Republican policy. Having been struck by the fact that federal 
expenditures under Eisenhower had actually declined vis-a-vis the 
gross national product I recently asked a top official in that admin- 
istration to explain to me why an administration, wedded to a 
theory of minimum spending by government, had not boasted of 
this accomplishment. Was the explanation a failure to understand 
that expenditures have meaning only in relation to the size of the 
national product, or was it merely that, should such accomplish- 
ments be publicized, this might increase pressures for more ex- 
penditures? The answer was both. 

Perhaps the greatest damage done by this ideology was in the 
defense of our country. As we shall see, the Eisenhower administra- 
tion had many Secretaries of the Treasury seeking cuts in defense, 
but scarcely one Secretary of Defense. In defending the unprece- 
dented pressure of Budget and Treasury officials at regular meetings 
of the National Security Council, Sherman Adams said: 

. . . The presence of the government's fiscal watchdogs at the meetings 
reflected the President's belief, often voiced, that the nation could be 
destroyed by spending itself to death as well as by force of arms. 14 

A reduction of defense expenditures by $10 billion early in the 
Eisenhower administration, the declining share of gross national 



Introduction: the major issues xxvii 

product going to defense even as our international situation de- 
teriorated, the resultant massive retaliation policy and inadequate 
arms to deal with brush fires — these were tragic mistakes. Even in 
the years when this nonsense on bankruptcy was repeatedly peddled 
by Eisenhower and his top assistants, they boasted, and inconsist- 
ently, of the highest employment, the highest gross national prod- 
uct, the largest number of schoolrooms and hospital beds made 
available, the largest rise of weekly wages in our history. 15 No at- 
tempt was made to reconcile these two lines. (Parenthetically I 
should add that the boast of the highest employment and the highest 
gross national product is subject to serious reservations. What is 
needed is not the highest ever, but rather an increase of GNP and 
employment adequate to absorb rising numbers on the labor market 
and the workers displaced by rising productivity.) 

In contrast to the Republican position, Kennedy in the first year 
of his administration added at least $5 billion per year to the military 
budget, thus conforming to the recommendations of at least four 
expert committees. In his Special Message on the Defense Budget, 
March 28, 1961, President Kennedy said: "Our arms must be ade- 
quate to meet our commitments and ensure our security, without 
being bound by arbitrary budget ceilings. . . . " 16 

8. 

Determined to keep spending down, the Eisenhower adminis- 
tration frequently confused the shadow with the substance. In 
World War II, a few OPA officials would unwisely be influenced in 
a decision to fix the price of a commodity, for example, oranges, 
according to whether or not oranges were in the price index. They 
could be lenient, that is, make concessions to the seller, if the com- 
modity were not included in the index. In a similar manner, the 
Eisenhower administration would spend or not, depending upon 
whether the outlays were included in the budget. The important 
matter should be, spend or not spend? But in a determination to 
show a budget that revealed economical management, the admin- 
istration would rely heavily on guarantees, for these were not con- 
sidered budgetary expenditures; sell assets of the government, even 
when it was costly in the long run, so long as the appearance of 
the budget improved; would divert funds from the Civil Service 
reserves and depend excessively on trust funds. The President even 



xxviii }£L introduction: the major issues 

wanted to finance a $100 billion road program out of a special trust 
fund. 

An indication of the use of accounting devices to mislead on 
public expenditures is given by the fact that from F.Y. 1953 to 1961, 
regular budgetary expenditures rose by $5 billion; but federal cash 
payments, largely inflated by the use of trust funds, increased by 
$21 billion. For the years 1946 to 1953, the relative increases had 
been $14 and $15 billion, 17 roughly equal rises in both categories, as 
against a 4 to 1 rise of cash outlays under Eisenhower. Perhaps it is 
significant that one of Budget Director David Bell's first moves in 
1961 was to shift the Eisenhower emphasis on accountants in the 
Budget Bureau to economists. 

9. 

A word about antirecession policy. Obviously, fear of govern- 
ment and of deficits restrains an administration in treating a re- 
cession. In the 1952 campaign, General Eisenhower promised every 
resource for reversing a business decline. And in 1954 a tax cut was 
introduced, though' it is not clear whether the objective was to 
stimulate the economy or to deliver on a promise to the adminis- 
tration's supporters. But the administration revealed no enthusiasm 
for tax cuts in 1958, and expressed great opposition to any spending 
program. An administration wedded to antispending policies may 
accept a tax cut even though this is contrary to its deficit theories; 
but never a rise of public spending. 

I do not believe that one will find an off-the-cuff reply (or even 
elsewhere) by Eisenhower equal to Kennedy's reply at his June 28, 
1961, press conference: 

The big problem will be to sustain it [growth] over a period of time. 
And that will require ... a tax system which provides a stimulation of 
growth, education and research . . . and also the monetary and fiscal 
policies which will recognize the necessity of preventing a recurrence of 
these successive dips. . . . The '60 recession came right on the heels of 
the '58 recession. Two reasons . . . may have contributed . . . the move- 
ment from a $12 billion deficit in '58-59 to an effective $4 billion sur- 
plus, which was a change of more than $16 billion in the potential re- 
ceipts of the government, which did have a restraining influence on the 
recovery. Secondly, of course, the long-term rates of interest were ex- 
tremely high. ... 



Introduction: the major issues xxix 

10. 

A party that is allergic to government is likely to be a party that 
does not want a strong President. In the Whig tradition, Eisenhower 
was careful not to pressure Congress. A theory of government like 
the Republicans' assumes a weak President; the Democrats', a strong 
President. Eisenhower is in the Republican tradition of the last 
generation and Kennedy in the Democratic tradition of the twentieth 
century. Whereas Eisenhower waited for Congress to act, Kennedy's 
method is a much more aggressive one. It is only necessary to com- 
pare the efforts and achievements of Kennedy and Eisenhower in 
their respective first years to realize how different their concepts of 
the Presidency are. In defense and welfare programs, Kennedy 
achieved more in his first year than Eisenhower did in eight. Indeed, 
the Republicans boasted of the great advance of social security 
under Eisenhower, and of the fact that research expenditures in- 
creased more than in any other period. The Eisenhower administra- 
tion deserves credit for this; but it is well to recall that Secretary of 
Defense Wilson vigorously opposed expenditures for basic research 
and that the Democratic Congress generally wanted to spend more 
on research than did the administration. It is also well to recall that 
the major outlays on research went to business, always an ally of 
the administration. In welfare, the administration could boast only 
of repeated requests of state governments to liberalize unemploy- 
ment benefits — with little net effect — and the improvement of the 
benefit schedules under old age insurance. But the latter is to be ex- 
plained by the fact that the liberalization in the benefit structure 
was acceptable only because it was not at the expense of the general 
taxpayer. Moreover, on crucial issues, for example, permanent dis- 
ability, the administration opposed. In summary, no major break- 
through occurred in the welfare area in the eight years of Eisen- 
hower that could match any of a dozen achievements in the preced- 
ing twenty years. The Eisenhower method was the veto threat as 
the weapon to stop progress. 

In his first year, Kennedy achieved much. But in some respects 
the year was disappointing. Congress agreed to long-term financing 
of foreign aid but not to back-door financing of the program that the 
President so much desired. He failed to get the rather conservative 
Ways and Means Committee to push medical aid for the aged under 
Social Security, though the Committee held hearings. The intrusion 



XXX }£L INTRODUCTION: THE MAJOR ISSUES 

of the religious issue in the aid to education program was enough, 
with the usual opposition of Southerners fearing pressure to inte- 
grate and of those objecting to more federal spending and fearing 
federal control of education, to kill the aid to public school educa- 
tion. Despite their promises to support an education bill, only 6 of 
166 Republicans in the House supported even an emaciated educa- 
tion bill in August, 1961. Possibly, as some have claimed, an early 
willingness to compromise did not help matters. It is also possible 
that, once the Berlin crisis emerged, the President became so con- 
cerned over the size of the deficit and so immersed in that crisis that 
he did not push the legislation as much as he otherwise would have. 
These failures stem largely from the usual difficulty of a Democratic 
President, even one supported by large majorities in the Congress, 
namely, the conservatism of a large proportion of Southern mem- 
bers. 

Against these defeats or semidefeats the President could point to 
numerous victories: a major expansion of the national security pro- 
gram, area redevelopment, higher minimum wages, temporary un- 
employment compensation, a self-financing highway program, 
liberalization of social security, an economic development program 
for Latin America, a start on civil defense, dependent children aid, 
the Organization for Economic Cooperation and Development, an 
expanded water pollution bill, and a liberal housing bill. But the real 
test will come in 1962, and the major domestic issue will be, can 
unemployment be brought down to a reasonable level, say, 4 per 
cent? Next in importance will be the education and medical aid 
bills. But it will not be easy to put across this legislation. 

11. 

In the debates over the achievements of the Eisenhower and 
Democratic administrations, there is frequent recourse to statistics 
and frequent differences in the interpretation of these statistics. 
Several instances follow. 

Supporters of the Democratic position contend that in the post- 
war period, the gross national product under Truman increased 
much more per year than under Eisenhower, and per capita a 
fortiori. But in reply the Republican supporters contend that, had 
the comparison included the years 1946 and 1947, the growth under 
Eisenhower would have exceeded that under Truman. Hence the 
crucial issue is, should 1946 and 1947 have been included? The case 
for the exclusion rests on the grounds that 1946 and 1947 were years 



Introduction: the major issues xxxi 

of demobilization. Not growth, but deflation is to be expected in such 
years. From 1944 to 1947, federal purchases of goods and services 
for defense dropped from $89 to $11 billion, and from 1945 from 
$76 billion, or a decline of more than one-third of gross national 
product. That unemployment rose only by 2 million, and that gross 
national product rose by $23 billion (current dollars) and declined 
only by $24 billion (in 1945 prices) was no small accomplishment in 
the face of an unparalleled demobilization. 

In relation to the growth of gross national product, the large rise 
of consumer and housing credit is also relevant. Consumer credit 
rose more rapidly than gross national product under both adminis- 
trations. But housing credit vis-a-vis gross national product rose an 
average of 1.3 percentage points vis-a-vis gross national product 
under Truman, and 2 per cent under Eisenhower. The latter made 
effective use of housing credit and guarantees, and also easing of 
down payments and extending terms — all factors contributing 
greatly to any rise of gross national product. These not only con- 
tributed much to the rise of output, but also increased the difficulties 
for Kennedy, since so much of the potential of credit and easing of 
housing terms had been exploited by the Eisenhower administration. 

A boast often made, and especially by Nixon, was that wages 
(real) rose more under Eisenhower than under Truman. Though the 
extent of the gain is overdone — for example, Nixon did not allow 
for the relatively large recourse to fringe benefits under Truman — 
Nixon is correct in his main conclusion. 18 But in the midst of the 
postwar inflation, wages at first lag behind and then gradually 
catch up. 

Still another claim of the Republicans is that there were more 
schoolrooms built in 1952-1960, more urban redevelopment projects 
since 1952 — "four times the number of slum clearance projects ini- 
tiated in all the years prior to 1953." 19 But here it is necessary to 
take account of the backlog of schoolrooms required, the small con- 
tribution of the Federal Government, and also the time required 
for urban redevelopment projects to mature after the important 
legislation in 1949. One should also consider the attitude of both 
parties to these projects. 

12. 

A charge often made against Kennedy is not that he had ad- 
vanced beyond Eisenhower — this is a criticism reserved for Repub- 
lican detractors — but rather that, as one able economist explained 



xxxii }0i introduction: the major issues 

the slow rate of progress in 1961, "this is the third Eisenhower ad- 
ministration." Along the same lines, Mr. Walter Lippmann in a 
June, 1961, television program said of Kennedy: What he has done 
in the first four or five months is "first of all to carry in all its essen- 
tials the Eisenhower economic philosophy . . . it's like the Eisen- 
hower administration thirty years younger." 

The source of this criticism of Kennedy lies in his failure to ac- 
cept much larger deficits as a means of stimulating growth and deal- 
ing with excessive unemployment. At the projected government 
deficit before the Berlin crisis, the estimated unemployment in 1962 
would be 6 per cent or at least 2 percentage points above a tolerable 
level. What many of these critics wanted as a means of reducing 
unemployment was a deficit of about $10 billion by F.Y. 1962 in- 
stead of an estimated one of $2-$3 billion. On purely economic 
reasoning, I agree with this line. But the issues are not only eco- 
nomic: they are also political. (Incidentally, the outlays under the 
"Berlin" program of July are likely to increase gross national product 
in the second quarter of 1962 above levels expected before this 
crisis, and hence reduce unemployment from the anticipated 6 to 
about 5 per cent. ) 

On issues of welfare legislation, the President has a tenuous, if 
any, majority in Congress. His political judgment evidently led him 
to conclude that Congress would not accept a deficit stemming from 
additional welfare outlays and/or tax cuts that would yield a $10 
billion deficit. No one has suggested that economists are more en- 
dowed with political acumen than the President. Realizing that on 
many programs the President is already ahead of Congress — for 
example, urban redevelopment, education — and determined to put 
through as much of his program as possible, the President opposed 
large deficits. 20 

Economists, critical of the President for moving too slowly, also 
have a responsibility: to disseminate modern economics to congress- 
men and — even more important — to their constituents, a responsi- 
bility they have not taken as seriously as they should. Most econ- 
omists today would see no great danger in deficits year after year if 
they were not excessive in relation to income. But the public is not 
prepared for these views. First they have to sell the idea of cyclical, 
instead of annual, balancing of the budget. 

In this connection, and despite these criticisms, I would argue 
that the President has moved further in the direction of modern 



Introduction: the major issues xxxiii 

economics — and in particular the use of fiscal policy to offset in- 
adequate or excessive private spending — than any other administra- 
tion, Republican or Democratic. Anyone who doubts the advance of 
the New Frontier should compare the fiscal thinking of Mellon, 
Hoover, Roosevelt, Morgenthau, Snyder, Humphrey and Anderson 
with that of Kennedy — and for that matter Dillon who broke new 
ground as Secretary of the Treasury in supporting publicly deficits 
as therapy for recessions. 

13. 

Perhaps an additional point can be made in support of the 
President's position. He seems to be somewhat more disposed to 
rely on direct attacks on the unemployment problem — for example, 
area redevelopment, manpower training — than many of the Wash- 
ington economists who stress much more fiscal measures. Un- 
doubtedly the general attack, that is through fiscal and monetary 
measures, is the more important approach. For example, I find that 
8 industries that experienced a reduction of jobs from 7y 2 million to 
5 million in the postwar period, suffered an average loss of 1 per 
cent in jobs per year in prosperous years and 8 per cent in years of 
recession. The explanation is, of course, more satisfactory demand 
in prosperous years, in turn related to monetary and fiscal policy. 

Nevertheless there is much to be said for the President's mix of 
general and special measures. First, beyond a certain point it be- 
comes much too expensive to treat unemployment in coal, textile, 
automobile, areas or towns through government deficits. Second, 
I find that on the average such programs as manpower training may 
well yield four to five times as many jobs added as deficit financing, 
per dollar of costs. But this calculation is based on certain assump- 
tions, and would not hold at all levels of unemployment. Oddly 
enough, I have been unable in Washington to discover any study 
of the possible cost of adding a job through alternative measures. 

14. 

With these comments, I move on to the main part of this book. 
But let me say first that almost everything follows from {he con- 
trasting attitudes of the two parties toward the responsibilities of the 
Federal Government. Since the Democratic party stands for an 
activist government, it also is the party of the strong president and 
of the adequate budget, of the party that will mobilize all weapons 



xxxiv ]0 introduction: the major issues 

to deal with a recession, stimulate growth, provide maximum em- 
ployment and minimum unemployment; and it will sponsor an ade- 
quate program to contend with the maladjustments that necessarily 
accompany growth and the diseases that prevail for other reasons. 
This kind of party is the party that Kennedy leads. I could not argue 
that in fact the party achieves all of this; but I could contend that it 
tries harder to do so than its competitor. 

In short, Kennedy holds that the budget is a weapon to be used 
for economic improvement; that the objective of economic policy is 
not a balanced budget but a balanced economy; that the budget and 
the monetary machine are weapons to be used for cyclical indis- 
positions, the diseases of structural unemployment, and to stimulate 
growth; that in order to achieve the larger gains the President has a 
responsibility to prevent any creeping inflation from becoming a 
galloping inflation; that fiscal and monetary tools, however impor- 
tant, are not the exclusive weapons for achieving economic goals, 
and that economic therapy must be tethered to political realities. 

15. 

This book deals with the following subjects in successive parts: 
(1) Creed; (2) Political Aspects; (3) Money; (4) Budget and Fiscal 
Policy; (5) Recession, Growth and Unemployment; (6) Welfare; 
(7) Use of Resources; (8) External Aspects. 



Part I 

CREED 



1. The ideology of the parties 



^1 1 start with Eisenhower's creed and then discuss that of his op- 
ponent in 1952 and 1956 and that of his potential heirs and of 
Kennedy. 

To understand the economic policy of the Eisenhower adminis- 
tration, and hence of the Republican party, one must first under- 
stand the philosophy behind that policy. The economic philosophy 
of the Eisenhower administration represents a convergence of 
streams of thought from many sources — from the men who have 
staffed that administration, from the party which came into power 
as a consequence of Eisenhowers popularity, from the groups in 
American society which have subsidized and supported that party, 
and, of course, from Dwight D. Eisenhower himself. 

Let us begin with the President and his views on economic issues. 
I am only an economist and cannot speculate about the psychologi- 
cal roots of economic conviction. One fact in the record does impress 
me, though. Sixty years ago, the Eisenhowers were a relatively poor 
family in Abilene, Kansas, living on the wrong side of the Union 
Pacific and Santa Fe tracks. Marquis Childs, in his biography of 
Eisenhower, tells us that the Eisenhower boys resented the snob- 
bishness of the affluent families on the north side of town. The boys 
themselves had to work hard from an early age, and they hated 
nothing more than the job of selling extra vegetables from their own 
garden farm to the people on the north side. "Loading up the buggy 
or a coaster-wagon with peas, beans, lettuce, corn, they would start 
out to show their wares from door to door and sometimes would take 
well-remembered rebuffs." x Conceivably, this childhood experience 
may have had something to do with Eisenhower's subsequent pen- 

3 



4 }0 THE ECONOMICS OF THE POLITICAL PARTIES 

chant for successful businessmen. Fraternizing with them may well 
have been a secret goal for young Eisenhower. 

In any case, Eisenhower went to West Point in 1911 at the age of 
twenty. He spent almost all the next forty years in the military serv- 
ice of his country. In these years, he showed himself a gallant and 
distinguished soldier, and the whole free world remains everlastingly 
in his debt. Yet, as a consequence of his career as a professional 
army officer, Eisenhower inevitably cut himself off from the main 
currents of American life in these forty years. The social and finan- 
cial reforms of the Wilson administration, the scandals of Harding, 
the speculative fever of the twenties, the crash of 1929, the fight 
against depression, the great changes of the thirties — all these were 
distant ripples so far as the national military establishment was 
concerned. When Eisenhower finally emerged from the monastic 
life of military professionalism, his experience had added little to 
the economic verities he had learned as a boy in Abilene. 

Abilene had given the young Eisenhower a simple Jeffersonian 
faith that that government was best which governed least. As the 
older Eisenhower once put it, "Jeff ers °n believed in keeping govern- 
ment close to the people by which is meant, central government 
must not be allowed to grow too powerful. ... I am quite sure 
that if he were alive today, he would gladly and necessarily vote 
against the New Deal." Compare this with another President who 
saw himself in the tradition of Jefferson. Woodrow Wilson wrote in 
1912: 

I feel confident that if Jefferson were living in our day he would see 
what we see: that the individual is caught in a great confused nexus of 
all sorts of complicated circumstances, and that to let him alone is to 
leave him helpless as against the obstacles with which he has to contend; 
and that, therefore, law in our day must come to the assistance of the 
individual. . . . Without the watchful interference, the resolute inter- 
ference, of the government, there can be no fair play between individuals 
and such powerful institutions as the trusts. Freedom today is something 
more than being left alone. The program of a government of freedom must 
in these days be positive, not negative merely. 2 

Hard experience had caused Wilson to realize that the Jeffersonian 
ends of equality and opportunity could no longer be achieved 
through the Jeffersonian means of littleness and localism. But Eisen- 
hower never had to confront the problems of modern industrial 



The ideology of the parties 5 

society. So he retained his commitment to Jeffersonian means; when 
he entered politics late in life, the big businessmen of America, who 
for reasons of their own wished to keep the Federal Government 
weak and ineffective, found him a ready listener. 

These were the men who had seemed so impressive when he 
viewed them from the wrong side of the tracks as a boy in Abilene. 
They seemed better than ever now. As he put it in Worcester on 
October 20, 1952: 

I believe in our dynamic system of privately owned businesses and 
industries. They have proven that they can supply not only the mightiest 
sinews of war, but the highest standard of living in the world for the 
greatest number of people. . . . 

But it requires someone to take these things and to produce the ex- 
traordinary statistics that the United States with 7 per cent of the world's 
population produces 50 per cent of the world's manufactured goods. If 
someone is to be given a name, I believe that his name is the American 
businessman. 

Such men became his closest advisers. They held the key positions 
in his administration. They composed the majority of those attend- 
ing his White House stag dinners. They have been his favorite com- 
panions at Gettysburg, Augusta and Palm Springs. As he himself 
once put it, when asked why he had made the head of General 
Motors the Secretary of Defense: "Who would you rather have in 
charge of that, some failure that never did anything, or a successful 
businessman?" — as if these were the only alternatives. Where 
Eisenhower clung to the Jeffersonian view of government for moral 
reasons, these men knew that big government was the only means a 
democracy had of limiting the power of big business, and, because 
they wished business to be dominant, therefore opposed government 
by every means at their command. 

What Eisenhower has done is to veil the rather cynical position 
of business self-interest with his own instinctive moralism. Thus he 
said in a speech in Birmingham on September 3, 1952, "Free govern- 
ment is the attempt to translate into the political world a deeply 
felt religious faith. . . . This country is, I believe, going to remain 
great by acknowledging the brotherhood of man under the father- 
hood of God." 

Again and again, Eisenhower has argued for a concentration of 
responsibilities largely on local and state government and avoidance 



6 }gi THE ECONOMICS OF THE POLITICAL PARTIES 

of excessive centralization. In Wheeling, West Virginia, on Septem- 
ber 24, 1952, he said: 

Fourth, we seek in America a government close to the people and 
responsive to their needs. In solving our problems, we want to walk along 
other roads than the road along the Potomac. We are united behind the 
principle of decentralized government as opposed to the focusing of 
governmental power in Washington. 

In his famous statement of September 12, 1952, after meeting 
with Eisenhower, Senator Taft made it a point to announce that the 
Presidential candidate was with him in opposing the Federal Gov- 
ernment: "... The price of a continued liberty, including a free 
economic system, is a reduction of federal spending and taxes, the 
repudiation of the arbitrary powers in the executive claimed to be 
derived from heaven and the stand against statutory extension of 
power by the creation and extension of federal bureaus." 

In expressing such views, Eisenhower was expressing what has 
traditionally been (except during the administration of Theodore 
Roosevelt) the policy of the Republican party. It is instructive to 
note (as the Democratic Digest did in 1954) the similarities in eco- 
nomic philosophy between Eisenhower and Herbert Hoover. 

In a letter to Representative Gwinn, General Eisenhower said 
on June 7, 1949: "Unless we are careful, the great and necessary 
educational processes . . . will become yet another vehicle by 
which the believers of paternalism if not outright socialism will gain 
additional power for the central government." 

Thus on security for Americans Hoover had said that the welfare 
state requires "that the government should guarantee every citizen 
security from the cradle to the grave." In Galveston, Texas, on De- 
cember 8, 1949, General Eisenhower had said: "If all that Americans 
want is security, they can go to prison. They will have enough to eat, 
a bed and a roof over their heads." 

On January 14, 1959, a reporter asked the President about 
his change of political philosophy since his early years in office. Mr. 
Eisenhower tried to define modern Republicanism. "I believe that 
we should cling very, very firmly to the principles, to the vision 
really, that our founders wrote into their great documents, and we 
should take those principles and apply them with problems of 
humans today. ... Of course problems are different, and therefore, 
let's meet the modern problems, and I would appeal to all Repub- 



The ideology of the parties 7 

licans ... to take very seriously this business of applying the real 
concepts of the founding fathers. . . ." 

In theory, this philosophy exalts competitive enterprise. But in 
practice the devotees of free enterprise often prefer monopoly to 
competition restored through government intervention. Thus Eisen- 
hower favored cuts in the appropriation for the Federal Trade Com- 
mission, the agency that supposedly protects us against monopoly, 
in the early years of his administration. He did appoint, or at least 
the Attorney General appointed, a committee to study the antitrust 
laws. But, as Representative Henry Reuss pointed out, 22 of the 60 
members were corporation lawyers engaged in fighting the govern- 
ment on antitrust matters. The record of antitrust prosecution was 
not good under President Eisenhower; but it should be added, in 
fairness, that it was not highly successful under President Truman, 
either, and also that the prosecution leading to the conviction of 
executives in the electrical industry in 1961 for price collusion was 
started under Eisenhower. The major contribution of government 
to economic policy, in Eisenhower's view, should lie in balancing 
the federal budget. 

The President's ideology, and Republican, on record, may be 
summarized as follows: that thrift, hard work, and the contributions 
of businessmen account for our prosperous economy; that we be 
wary of panaceas; that principles of our founding fathers were free- 
dom for the individual and no strong central government. Where 
government is necessary, it should be near the people primarily at 
the local and state level. If business is to make its maximum contri- 
bution, there must be adequate incentives and competition must 
prevail. America is great because it is good. We can afford to be 
liberal with people but must be conservative with our money. 

This ideology, embraced by Hoover (and Eisenhower), was not 
a great help in the Great Depression. Interestingly enough, in the 
twenty years between 1933 and 1953 politicians, college professors, 
and lawyers, with little help from business, wrought a revolution in 
the economic policy of the United States. Repudiating laissez faire, 
they saw the simple fact that if capitalism was to survive, govern- 
ment must take some responsibility for developing the nation's re- 
sources, putting a floor under spending, achieving a more equitable 
distribution of income, and protecting the weak against the strong. 
The price of survival for the free society was to be limited interven- 
tion by government. 



8 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

In its first year, the Roosevelt administration, operating on both 
the recovery and reform fronts, provided for the reopening of the 
banks, struck a blow at the outmoded gold standard, reformed the 
banking system quite apart from the guaranty of banking deposits, 
saved the country from complete financial collapse by making ample 
funds available to reduce bankruptcies and liquidation, spawned a 
spending program to provide relief, social security, and investment, 
launched the TVA development, introduced important farm legis- 
lation offering farmers protection against declining farm prices and 
foreclosures, and passed legislation to protect investors. 

It is idle but interesting to conjecture on how President Eisen- 
hower would have coped with the situation in the 1930's. Under the 
pressure of disaster, ideologies may suffer changes. President Hoover 
was indeed implacable. But President Eisenhower seemed somewhat 
more flexible. In 1953, for example, he opposed the strong movement 
within his own party to weaken, if not destroy, the Social Security 
program. In the early years, the President's creed seemed somewhat 
adaptable, but not in more recent years. 

What is the President's creed, and that of his party leaders, and 
how does one find out? From campaign speeches and public docu- 
ments, one gets some idea of the President's position. But we cannot 
be too sure. In many years in military service, the President had very 
little time to think about these problems. Undoubtedly, being a mili- 
tary man, he was predisposed toward a conservative position, for 
military men are not generally innovators. It is not always possible 
to distinguish the President's views from those of his ghost writers. 
But judging particularly from his remarks before he became Presi- 
dent, one has the general impression that he was conservative: 
against too much government, against excessive spending and un- 
balanced budgets. Yet, before his election to the Presidency and 
after, he occasionally commented on the important things govern- 
ment must do rather than the things that government must not do. 
For example, at a meeting with members of the Republican old 
guard in 1947, at which Senators Taft and Vandenberg were also 
present, General Eisenhower is reputed to have said the following: 
(The issue at stake was how to cure the domestic inflation.) 

. . . His proposal was that the government call in the big industrial 
leaders of the nation and put the pressure on them to agree to reduce all 
prices for a period of two or three years, so as to eliminate all profit what- 
soever. . . . When it was suggested that maybe the idea would not 



The ideology of the parties 9 

appeal to them, the General is reported to have suggested that the solu- 
tion, then, would be for Congress to enact a 100 per cent tax on corpora- 
tion profits, and use the proceeds for programs of subsidies, to bring the 
prices down by force of government. 3 

And R. J. Donovan makes clear in his Eisenhower, The Inside 
Story, that in 1953 and 1954, the President, in his tussles with Secre- 
taries Humphrey, Weeks, Wilson and others, was often on the side 
of government action. He pleaded with his millionaire cabinet to do 
things for the little man, and he argued strenuously against drastic 
military cuts in order to achieve budgetary balance. Following the 
outburst of Secretary Humphrey in early 1957 over the size of the 
budget, the President seems to have returned to his former rather 
rigid views. In 1957-1959, he was genuinely disturbed about the 
amount of spending, about the instability in the value of the dollar, 
about the high level of taxes, excessive demands on the government, 
and the like. In fact, there is a good deal of evidence to show that 
the President's views in 1959 were much more like Hoovers than 
those he held in 1953 or 1954. 

President Eisenhowers Advisors 

To understand the economic policies of the Eisenhower admin- 
istration and of Republicanism, one must, of course, take into ac- 
count, above all, the first Secretary of the Treasury, George 
Humphrey. Humphrey has often been compared with Secretary 
Mellon in the Hoover administration and with the founder of the 
Hanna Company, Mark Hanna, who put McKinley in the White 
House in the late nineteenth century. All three believed in a weak 
government, low taxes, freedom of business to operate without inter- 
ference from the government, and, of course, all three were very 
wealthy men. Childs, in discussing the Cabinet, wrote as follows: 

The men whom he summoned to Washington and put in position of 
great power for the most part, shared his faith. . . . 

. . . The President had named George M. Humphrey as his Secretary 
of the Treasury and Charles E. Wilson as the Secretary of Defense. . . . 
Their honest, deeply held convictions came not out of any organization 
lexicon, conned with an eye to advancement in the organization, but out 
of their own background and experience. 

In discussing the Humphrey appointment, Mr. Childs said: 



10 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

It was perhaps the most fateful decision the President was to make, 
for Humphrey's influence was largely to determine the course of the 
Eisenhower Administration, and it is scarcely an exaggeration to say that 
he, more than any individual, except the President himself, set the tone 
of the Eisenhower era. From their first meeting in the Commodore, 
Humphrey and the President-elect were obviously made for one another. 
As he walked in to meet his new boss, the balding Humphrey was greeted 
by Eisenhower with "George, I see you comb your hair just the way I 
do." I knew right then, Humphrey says, that we would get along to- 
gether. 4 

It is clear from Donovan's book that Secretary Humphrey led 
the fight against federal spending and for budget balancing at 
almost any cost, even to our foreign and defense policies. 5 Thus, 
early in 1955, talk about a Marshall Plan for Asia came to nothing 
because of the restraining hand of Humphrey. As I write in the 
spring of 1961, many will argue that, on the basis of our Laos expe- 
rience, the Secretary had saved the country resources. It was quite 
clear that Mr. Humphrey similarly used his persuasive powers to 
cut the military budget. The Economist, for example, wrote in 1955: 

In Washington it is suspected that the coming cuts in the number of 
men in the armed forces, announced just before Christmas are the result 
of the old, unbalanced, look of the budget rather than of the new, atomic 
look of defense policy. 

"The new program is dictated primarily by economy rather than a 
combat effectiveness," said the New York Times. "The Secretary of the 
Treasury George M. Humphrey looms larger even than the Joint Chiefs of 
Staff as an architect of our new military policy." Even Time magazine 
said, "Humphrey's approach is sound, inevitable — but negative in a 
situation that cries for a builder." 

In every way, Humphrey opposed positive government action. 
Here is a typical colloquy with Senator Anderson. Senator Anderson 
asked for selective controls. 

Secretary Humphrey answered: "No, and I am opposed to that. 
I just do not believe that — I said a minute ago, I just do not believe 
that there is any group of men who are so smart that they can tell 
everybody in America what to do and be wiser than the great bulk 
of our people who are actuated by an incentive free choice system. 

"I believe with all my heart in an incentive free choice system. I 
believe it is what has made this country. . . ." 6 



The ideology of the parties 11 

Humphrey had some opposition within the government. Perhaps 
his leading critics were Dr. Arthur Burns, the able chairman of the 
President's Council of Economic Advisors, and Dr. Gabriel Hauge, 
the President's personal economic advisor. As an economics profes- 
sor, Burns had tended to resist the new economics; but in Washing- 
ton he became more flexible. Hauge had learned the elements of 
modern fiscal policy at Harvard, even though at times he espoused 
an ideological position that made positive fiscal action difficult. 
Both men favored affirmative federal action against recession. But 
Humphrey generally won the intramural debates. In particular, 
Eisenhower seemed to accept his belief that balancing the budget 
was the best contribution government could make to stopping a 
decline in business. 

Humphrey's influence survived his departure from the Treasury. 
The President, to the end of his administration, often relaxed on the 
Humphrey plantation in Georgia, and the choice of Robert B. Ander- 
son as Humphrey's successor as Secretary of the Treasury was sup- 
ported, if not initiated, by Humphrey himself. Anderson continued 
to press basic Humphrey positions, though in a somewhat more 
moderate and discriminating manner. 7 

At Humphrey's right hand was Under Secretary Randolph Bur- 
gess, who, as we shall show later, was responsible for some rather 
dubious debt-management policies. But here it is of some interest 
to see that Burgess shared a view that is very common with those 
who oppose government activity: namely, that government spending 
is not productive, whereas private spending is. 

. . . that is a point we always try to make, that when the Government 
spends money, it does not produce goods which the people can buy. 

On the other hand, if we have an increase in commercial loans of 
banks, the mechanical effect at the borrowing window may be just as 
inflationary as with the Government, but the people who borrow use the 
money normally to produce goods or services which meet human needs, 
so it tends to balance off the additional creation of money. 8 

Other members of the Cabinet similarly opposed positive govern- 
ment in favor of a free hand for business. Interior Secretary McKay 
in a speech to the United States Chamber of Commerce on April 
29, 1953, said: "We are here as an administration representing busi- 
ness and industry." 

Later we shall discuss Mrs. Hobby's handling of the Salk vac- 



12 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

cine. Mrs. Hobby's whole history suggests that she would not be in 
favor of the government doing very much, and hence was the last 
person to put in charge of the Department of Health, Education 
and Welfare (HEW). Quite appropriately, the Department became 
known in Washington as the Department of Not Too Much HEW. 
There were others in the Cabinet who held views at variance with 
stated policy. Agricultural policy for many, many years has been 
dictated on the general position that the farmer cannot be left to 
the mercy of unbridled market forces, and in Eisenhower's first 
campaign, this farm position was often stated. Yet the President ap- 
pointed as Secretary of Agriculture a man who had almost a fanati- 
cal devotion to the free market: Ezra Taft Benson. 

Many Republicans in Congress, of course, held a similar ideology. 
Senator William Knowland, once the Republican leader in the 
Senate, summarized the achievements of the Republican Adminis- 
tration in the Eighty-fifth Congress as reducing federal spending, 
maintaining the stable dollar, and restoring power development to 
private enterprise and local government. 9 

Another leader of the United States Senate and close associate 
of the President, Senator Prescott Bush, said: "Can the Government 
provide capital without weakening the ability of its own citizens to 
do so? The answer of the record is clearly in the negative. . . ." 10 

We should not end this survey of Republican philosophy without 
commenting on the views of an official philosopher of the Republican 
party, Arthur Larson, who, in the introduction to his book, concludes 
as follows : 

That the end product of this distillation from somewhat varying views 
turns out to be a clean-cut design with internal consistency and a posi- 
tive sense of direction is due to two things: first, the fact that President 
Eisenhower, probably as much as any President of modern times, has 
operated from a conscious set of fundamental principles; and second, 
the fact that this design can be systematically carried out, because these 
principles are shared by the leaders in his Administration, by the majority 
of Republicans and, I believe, by the majority of all Americans. 11 

And what are the principles of the new Republicanism as sum- 
marized by Mr. Larson? 

1. We begin by acknowledging reverently the existence of a god of 
order, justice and love. . . . 



The ideology of the parties 13 

2. The individual person is the pre-eminent object of all of our politi- 
cal arrangements. . . . 

3. Government should be as local as possible. . . . 

4. Whatever can be done privately should be done privately. . . . 

5. The government has a responsibility for prosperity which it dis- 
charges best by aiding and releasing, not by overruling the forces of 
private enterprise. 12 

All in all, Larson interprets the Republican philosophy well. 
The emphasis is on private initiative, private incentives, noninter- 
ference with these incentives, government at the local and state 
level, insofar as possible an order of things arranged by a sort of 
Adam Smith invisible hand, with some responsibility grudgingly 
conceded to government for welfare. The real issues arise when 
these principles are put into practice. When are the incentives sacri- 
ficed in order to achieve national objectives? When does the Federal 
Government, rather than state and local, do the job? 13 

The Democratic party, in the tradition of Bryan, Wilson and 
Roosevelt, sees government as a constructive instrument of national 
purposes — not as the enemy of the people but as its servant. In re- 
cent years, Adlai Stevenson has given eloquent expression to this 
general view. 

The Ideology of Governor Stevenson 

The contrast of views is suggested by a few excerpts from Steven- 
son's speeches. 

What ought to be done by government for the public welfare should 
be done. There should be no wistful dragging of the feet or turning back 
to a dead though relevant past. 

... It [government] must not be afraid of raising and spending 
money for worthy purposes, but it must detest and fear waste and dis- 
honesty as ever-present threats to the whole moral basis of government by 
the consent of the government, because people don't consent voluntarily 
to be cheated or abused. 

In discussing Coulee Dam in "The People's Natural Resources," 
Seattle, Washington, September 8, 1952, Stevenson first spoke of 
Seward's Folly, which led to the development of Alaska. 



14 ^M THE ECONOMICS OF THE POLITICAL PARTIES 

The profligate waste of the taxpayers' money by a spendthrift bu- 
reaucracy has paid off. Seward's Folly has become our wealth and our 
security. 

Now I draw a moral from this story. The moral is that the people who 
conduct the nation's business frequently know what they are doing — 
partisan assertions to the contrary not withstanding — and that an invest- 
ment made on behalf of the public is not necessarily money poured down 
a rathole — or out here I should say money over the dam." 

In an article for Fortune, October, 1955, the Governor elaborated 
the view that government and business must work together: "The 
. . . bounding prosperity of post-war America has been due in 
large measure to processes in which government and business have 
in effect very complementary and cooperative roles. The New Deal 
legislation of the thirties helped to provide a 'built in' consumer de- 
mand that business could then work to satisfy. . . ." 

As Stevenson put it in Kansas City during the 1956 campaign: 
"But there are some problems which local and state leadership can- 
not wholly meet. The problem of water is one. It is a regional prob- 
lem and a national problem. Localities and states trying to deal with 
it are inevitably driven into conflict with each other over water 
supplies, flood control, and the location and type of dams, and so 
on. . . . 

Or again at Los Angeles the same year: "Only the foresight of 
government will determine whether the new automatic machines 
will mean a more abundant life or unemployment. Government can- 
not stand aside while the second industrial revolution takes place." 

In a speech before the Woodrow Wilson Centennial, November 
12, 1955, at Charlottesville, Virginia, discussing Woodrow Wilson's 
contribution, Governor Stevenson said as follows : 

. . . The last years of the nineteenth century have seen ominous con- 
centration of wealth, and with the political power in a few hands. And 
the economic system, left to itself would not reverse the process which 
it had, in fact, set in motion. Laissez faire could not cure what laissez 
faire had helped to start. Only one agency commanded enough authority 
to redress this dangerous unbalance and this was the national govern- 
ment. . . , 14 

This was W 7 ilson's greatest undertaking. 

These excerpts from the hundreds of speeches by Stevenson 
made in the years since 1952 give some indication of his belief in 
what Woodrow Wilson called a "positive" program for freedom. 



The ideology of the parties 15 

Words and Deeds 

One does not, of course, necessarily find in the activities of the 
Republican administration a faithful reflection of its ideology. One 
reason is that ideas do not necessarily lead to action. Another is that, 
if ideas are to bring action, vigorous and aggressive leadership is 
required. Third, the Democrats' control of Congress during most 
of the Eisenhower period has obstructed attempts to convert values 
into programs. Finally, it is not always easy to repeal laws that the 
Republic has already accepted and that in general it favors, what- 
ever the ideology of the party in power. 

The administration has surmounted the last difficulty to some 
extent through repeal by appointment. Congressman Rayburn was 
reported to have said that the GOP had discovered that it could not 
repeal laws introduced by the previous administration. Therefore, it 
tended to appoint officials who would be hostile to the programs 
that they were supposed to administer. 

For example, Albert M. Cole was made an administrator of the 
Housing and Home Finance Agency, even though he voted as a 
Congressman against most of the important public housing pro- 
grams. John B. Hollister, while a member of Congress, voted against 
the Reciprocal Trade Agreement and was known to share Senator 
Taft's economic isolationist viewpoints. Nevertheless, he became 
the head of the agency for administering foreign aid, the Interna- 
tional Cooperation Administration. 

As Assistant Secretary of Agriculture, James J. McConnell was 
in charge of the Price Support Programs he had referred to a few 
months earlier as "a perfect example of modern socialism." 

As Congressman from North Dakota, Fred A. Aandahl voted five 
out of seven times against public power programs. Naturally he be- 
came Assistant Secretary of the Interior in charge of power. 

As Congressman from Montana, Wesley D'Ewart was a leading 
advocate of a bill to turn public grazing land over to private inter- 
ests. He became the assistant Secretary of the Interior in charge of 
lands and reclamations. 

The Chairman of the Federal Power Commission, Jerome F. 
Kuykendall, who was supposed to represent the public against the 
public utilities, had represented gas utilities in cases before the 
United States Public Service Commission. Similar comments can be 
made on appointments to the SEC, FCC and other agencies. 



16 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

In Democratic administrations such appointments, when con- 
flicts of interest misfit arise, were also made. But surely this practice 
had become much more general after 1952. 

As Chairman of the National Labor Relations Board, responsible 
for fair treatment of labor and capital, the President appointed Guy 
Farmer, the lawyer who specialized in labor law, mainly as an ad- 
visor to industry, also Albert Beeson, a labor relations director for a 
large California corporation, to the powerful post of general counsel. 
Peter A. Strobel, a consulting engineer whose firm provided services 
for architects, became Commissioner of Public Buildings. Yet he was 
responsible for awarding contracts in government buildings to archi- 
tects. We recall also that at one point Eisenhower had appointed a 
Commissioner of the Bureau of Internal Revenue who later an- 
nounced that the income tax was a great fraud. In short, one can 
destroy a program or at least change it through legislation. An easier 
way out is to repeal, by appointment, a technique frequently used 
in recent years. 

Executive Leadership 

Unfortunately, Eisenhower was not always well during his 
Presidency, and his poor health reduced his capacity to convert his 
ideology into policies. But even before he was ill, he had a relaxed 
attitude toward the Presidency. The pro-administration United 
States News and World Report estimated on May 14, 1956, that 
even before his heart attack, he had spent 81 days a year on vaca- 
tioning, compared with 40 days a year for President Truman and 39 
days for President Roosevelt. He spent a total of 40 per cent of his 
time away from Washington. In 1953, for example, although well, 
he was away from the White House 114 days. The record in 1960 
might well be an all-time one for days away from Washington — a 
reflection of an escapist attitude toward the office. Strong Presidents 
generally seem to be Democrats. President Kennedy is also away 
from Washington most weekends. But few would say that Kennedy 
is a lazy President. He works even when he is away. Having been 
on the President's plane, I can vouch for his activity in transit. 

On February 12, 1954, when the danger of our involvement in 
the Indo-China War was so seriously threatened that the leading 
Senators asked for a briefing from the Administration, the President 
left to go quail hunting in Georgia with George Humphrey. The 
New York Times reported that as the Reds were getting closer to 



The ideology of the parties 17 

the big Indo-China fortress, the President "varied his Georgia vaca- 
tion today by signing a dozen bills but he didn't neglect his golf . . . 
he played 18 holes. . . ." 

On February 17, 1954, President Eisenhower said that unem- 
ployment was serious and would have to be watched day by day. 
And on this note he departed for a five-day vacation in California. 

It was also clear that Eisenhower delegated to his assistants, in- 
clusive of the Cabinet members, the responsibility for policies that 
had ordinarily been undertaken by the President. The great appeal 
of Humphrey, Dulles and Adams lay largely in their willingness to 
take over powers normally exercised by the President himself. 

One result of abdication of responsibility was that the President 
was ignorant of important developments. For example, Trevor 
Gardner, formerly in charge of the Air Force Missiles programs, 
said the President was completely uninformed on the United States 
missile lag because his staff had given him an incomplete picture of 
the crisis. Former Senator Harry Cain said the President's advisors 
were not telling him the truth about the federal security system. 
The Army Chief of Staff, General Ridgway, said that the President 
had not been told about objections from the Joint Chiefs of Staff on 
the sharp defense cuts of 1955. 

Not only did his abdication result in failure to know what was 
going on, and, therefore, inadequate or wrong action on the part of 
the government, but the President, because of lack of interest and 
perhaps partly because of poor health, failed to follow through on 
some of his own legislative proposals. With a crucial bill on Educa- 
tion before the Congress in 1957, he did nothing to whip his own 
supporters into line. As a result, 116 GOP Congressmen voted 
against and killed a bill that the President nominally supported. 

James Reston noted in the early years that Eisenhower "has not 
satisfied the Republicans who nominated him or the Republicans 
who opposed him in Chicago, but he is doing his level best to avoid 
a break with either group. . . . One day he emphasizes the neces- 
sity for low-tariff policy and the next day he appoints a high-tariff 
advocate. ... He may defend the rights of Civil Service one week 
and back Senator Joseph R. McCarthy, Republican of Wisconsin, 
the next; ... we have a moral obligation to wipe out slums in 
March and cut the public housing budget in May. . . ." 

Early in the new administration, the Washington Post said: "The 
President seems unwilling to grapple with the problem of the will- 



18 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

ful men among the Republicans. . . ." Even Life magazine wrote 
that a lot of confusion in Washington "has risen from the leadership 
vacuum created by Eisenhower's long insistence on leaning over 
backwards to avoid even a semblance of dictating to Congress." 

In disagreements between his Cabinet members the President 
generally did not take a decisive position. For example, despite his 
promise that the disagreements of the Truman administration would 
not prevail in his administration, the opposite was true. Labor Secre- 
tary Mitchell and Commerce Secretary Weeks dueled over the 
administration policy. When Secretary Mitchell criticized state right- 
to-work laws, the White House denied that he spoke for the admin- 
istration. Again, Treasury Secretary Humphrey stopped an Economic 
Aid Program and went to Rio to chill a Dulles program for economic 
aid for Latin America. At one point Mr. Eisenhower said the war 
danger had diminished; Mr. Dulles thought there was no change. 

The record reveals incident after incident of the President's ig- 
norance and unwillingness to take action: in 1955, when it became 
quite clear that the Russian air power had advanced much further 
than the West had realized, the President, when questioned, could 
only say that no action had been taken since no recommendation 
had been made to him. In the Formosa crisis the President was asked 
if Formosa could be held without committing American ground 
forces. His answer was that he had received no recommendations 
and he could make no reply. Time and again he either could not 
recall or had forgotten important matters, for example, his position 
on extension of unemployment benefits beyond the customary six- 
month period. 

In order to assess the accomplishments of the Eisenhower admin- 
istration one should, of course, have full information. But one of 
the remarkable changes of these Republican years has been the 
increased recourse to executive privilege by the administration to 
keep information from the public. This was brought out very clearly 
in the Dixon-Yates Affair and more recently in the settlement of the 
government suit against the American Telephone and Telegraph 
Company. The administration tried very hard to keep the details 
of this antitrust settlement secret, claiming executive privilege. 
Ultimately the investigating Congressional Committee discovered 
that this settlement was against the advice of staff members and that 
a high official of A.T.&T. had requested and received some help 
from Defense Secretary Charles E. Wilson in settling the issue. 



The ideology of the parties 19 

More recently the refusal of the Air Force Personnel Department to 
allow the General Accounting Office of the government to investi- 
gate its accounts brought a storm of protest from the press. The 
President at first supported the General Accounting Office but later 
retracted. 

A Congressional Committee reported: "An informed public makes 
the difference between mob rule and democratic government. If the 
pertinent and necessary information on governmental activities is 
denied the public, the result is a weakening of the Democratic proc- 
ess and the ultimate atrophy of our form of government." 15 

Under pressure from this committee, a number of concessions 
have been made by the executive branch. 

Conclusion 

The Eisenhower and the Republican view is that the role of 
government is to create the proper climate* for businessmen by re- 
ducing government expenditure, balancing the budget, diminishing 
government responsibility for social welfare and economic regula- 
tion and, in general, transferring power from government and labor 
to the business community. Economic salvation lies, in this view, in 
maximum incentives for business rather than in opportunity and 
security for the many. 

In general, Eisenhower's theory of the Presidency seems to go 
back to Whigism (see Herbert Agar, The Unquiet Years: 1945- 
1955). The President should be as neutral as possible and intervene 
only when that is the only possibility. Implicit is the belief that the 
best outcome will result when things are allowed to take their 
natural course. The President failed to see that the institutional 
structure excludes neutrality by the executive. 

Stevenson, Kennedy and Democrats generally have rejected the 
trickle-down theory — that if the businessman is given the oppor- 
tunity to make a killing, the resulting gains will trickle down to the 
workers. The Democrats have conceived the role of government as 
that of promoting high levels of economic activity through wise 
fiscal and monetary management of the economy, through govern- 
ment support of demand, especially through increased resources of 
the low-income groups, and through government maintenance of 
the countervailing power of the various groups in our free economy. 



2. Those in control 



}0, Big Business, as one of the great interests in our society, has a 
legitimate place in government. Representatives of Big Business 
have often made selfless and valuable contributions to the public 
service. Yet ours is a manifold and varied society, and no adminis- 
tration should draw an overwhelming share of its appointees from 
any single group, whether big businessmen or labor leaders or 
farmers or college professors. I have put together some statistical 
information on the appointments made by President Eisenhower 
and, for purposes of contrast, I have also studied appointments 
made by President Roosevelt. 

In this study x 180 major appointments by President Eisenhower 
and 117 such appointments by President Roosevelt in the early years 
of his administration 2 were examined. Wherever information could 
be found, we included members of the Cabinet, Assistant Secretaries, 
members of regulatory commissions, chief counsels of large depart- 
ments, and members of executive agencies. It was more difficult to 
obtain information on the background of the members of the Roose- 
velt administration than of the Eisenhower administration. We de- 
pended for information primarily upon the files of such publica- 
tions as The New York Times, the Congressional Quarterly, 
Congressional Hearings, Who's Who and Moody's. 

In general, the following conclusions may be drawn. The Eisen- 
hower administration relied heavily on large business, on lawyers 
from small and large firms and on members of trade associations. 
Roosevelt relied relatively more on lawyers from smaller firms, 
academicians, members of the press, those previously associated with 
state and local government and federal career employees. 
20 



Those in control 21 

The Major Eisenhower Appointees 

Consider the major original appointments of the Eisenhower 
period. The Secretary of State, John Foster Dulles, was one of the 
top lawyers in New York City; the Secretary of the Treasury, Mr. 
Humphrey, is listed as a director of more than twenty major com- 
panies, and is President of the Hanna Corporation, with assets of a 
few hundred million dollars. 

As Secretary of Defense, the President appointed Mr. Wilson, 
the chief executive officer of General Motors, the Number One 
corporation of the nation. In the first two years of the Eisenhower 
administration this corporation led the nation in total contract 
awards (net) with $6.6 billion. 

As Attorney General the President appointed Herbert Brownell, 
Jr., an astute politician but also a high-priced lawyer in one of New 
York's large law firms. The Secretary of the Interior, Mr. McKay, a 
former Governor of Oregon, also had a large automobile agency and 
was known for his opposition to the Columbia River Authority. 

It might be expected that a businessman would head the De- 
partment of Commerce. But Mr. Weeks had so associated himself 
with Big Business that spokesmen for Small Business time and again 
have rebuked the Secretary when he attempted to take over control 
of the Small Business Administration. They have charged him with 
being allied with Big Business. A Congressional Committee was 
unable to obtain from Mr. Weeks the papers of the Business Ad- 
visory Council for the Department of Commerce. The Executive 
Committee of this group, 3 supposedly representative of all business, 
sounds like the Who's Who of Big Business, with the exception of 
the able ex-Dean of the Harvard Graduate School of Business Ad- 
ministration. 4 

The Secretary of the Business Advisory Council revealed that the 
BAC had become a source of supply of businessmen for the govern- 
ment. This Committee aggressively sought businessmen for the 
government and then pressed them on the government. 5 

As Secretary of Labor, the head of the Plumbers Union was ap- 
pointed. There was a great outcry, and ultimately the vice-president 
of Bloomingdale's took his place. The originally appointed Secre- 
tary of Health, Education and Welfare, Mrs. Hobby, is the wife of 
a very wealthy newspaperman from Texas. Her successor, Mr. 
Folsom, is treasurer of Eastman Kodak and, it may be added, a man 



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Those in control 23 

of ability. The Secretary of Agriculture, Mr. Benson, perhaps the 
most devoted supporter of the free market in the Cabinet, was a 
farm cooperative leader. 

The description of the Cabinet as a millionaire Cabinet is not 
too far from the fact, especially if the names of Mr. Dodge and Mr. 
Hughes, directors of the Bureau of the Budget, Mr. Burgess, Under 
Secretary of the Treasury, almost as devoted to the free market as 
Mr. Benson and the various Assistant Secretaries are added to the 
list. 

(I should say that the President's replacements were better than 
the original appointments: the more flexible Anderson over the 
stubborn but persuasive, able and personable Humphrey, Rogers 
over Brownell, the capable Folsom, one of the few businessmen who 
supported social security in the 1930's, in place of Mrs. Hobby, the 
reasonable Seaton over McKay, whose mission was to minimize 
government operations of the nation's resources. ) 

In addition to those mentioned, we counted at least forty Big 
Businessmen in the early years of the Eisenhower administration: 
Aldrich, Robert Anderson, Belcher, Dodge, Dulles, Fogler, Gates, 
Hughes, Lourie, Rand, H. C. Rose, Seaton, Schaeffer, Stevens, 
and so on. 

The Roosevelt Appointments in the Early Years 

The Roosevelt administration in its first three years seems im- 
poverished indeed in its recourse to the wealthy. Dean Acheson, 
T. Jefferson Coolidge, Hugh Johnson, Joseph Kennedy, Josephine 
Roche, Laurence Steinhart, Jesse Straus, Henry Morgenthau, Jr., 
W. Averell Harriman, S. Clay Williams and William Woodin are 
perhaps the names to be set against the more numerous and more 
prominent men of wealth in the Eisenhower administration. 

Whereas in the early years of the Roosevelt administration, the 
prominent names were not men of business but idealists and re- 
formers out of the colleges, state government, Federal Government 
and of reform movements, the big names since 1952 have been 
those of business leaders. Ickes, Hopkins, Berle, Tugwell, Hull, 
Eastman, Lilienthal, Arthur Morgan, Pecora, Frances Perkins, Peck, 
Wallace, Sprague and Warren are names that stand out in the first 
administration of Roosevelt. Whereas Adams, Burns and Benson are 
a small minority of prominent nonbusinessmen in the administra- 
tion, the big businessmen were the exception in the Roosevelt ad- 



24 ]& THE ECONOMICS OF THE POLITICAL PARTIES 

ministration. In fact, aside from Arthur Burns, whose position neces- 
sarily falls to an academic economist, it is difficult indeed to find 
among the hundred or so important Eisenhower appointments an 
academician, a newspaperman or one from government who might 
rightfully be considered important in making decisions of vital im- 
portance to the American people. Eisenhower's crusaders were the 
well established and well heeled businessmen and their satellites, not 
the young lawyers or academicians who joined the Roosevelt cru- 
sade. 



3. Appointments under Kennedy 



^ Chapter 2 was devoted to an analysis of the early appointments 
of President Eisenhower and these were compared with Roosevelt 
appointments. The heavy reliance by Eisenhower on business, and 
especially big business, was striking. 

In contrast, 199 early high-level appointments in the Kennedy 
administration came primarily from government, and secondly, 
from the academic world. The contrast between the Eisenhower and 
Kennedy policies is revealed by Table 2. 

TABLE 2 

Early High-Level Appointments, Kennedy (199), 
and Eisenhower ( 180 ) 





Kennedy 


Eisenhower 




Nos. 


Per cent 


Per cent 


From government 


93 


47* 


28 


Academic and nonprofit organizations 


35 


18 


6 


Business, finance and insurance 


12 


6 


36 


Law 


29f 


15 


11 


Press and public relations 


8 


4 


3 


Politics 


9 


5* 


8 


Farmers and farm organizations 


4 


2 


2 


Trade unions 


5 


3 


2 


Trade associations 








6 


Not clear and miscellaneous 


4 


2 






199 102 1 102J 

* But former governors and governors numbered 13. These are included 
in the first row. 

f 8 included here also closely tied to government in earlier administrations. 
| Deviations from 100 owing to rounding. 

Sources: The Eisenhower figures from Chap. 2. Kennedy figures based on 
listing of Congressional Quarterly of February 10, 1961, and March 17, 1961. 

25 



26 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Before commenting on these figures, I should remind the reader 
that these are the top jobs: patronage is available for thousands of 
other jobs. But these do not include the two hundred or so posts 
listed here. According to the January 20, 1961, issue of the Congres- 
sional Quarterly, the potential patronage available to President Ken- 
nedy was estimated at 6,000, with salaries of approximately $54 
million. But many of these career-service exempt jobs are held by 
persons with "status," which protects them from summary removal. 
There are 827 positions in government filled by Presidential ap- 
pointment with the approval of the Senate, and 379 additional ones 
not requiring approval of the Senate. 

What do these figures suggest? Relatively Kennedy depended 
1% times as much on government, 3 times as much on academicians, 
and y G as much on business (inclusive of finance and insurance). 
These are the most important differences; but note also that Eisen- 
hower relied heavily on trade association officials — 6 per cent, and 
1.6 times as much relatively on political appointees, that is, men who 
previously had been employed by the party or in the campaign. 

Related to the last is the point that 13 Republicans were given 
high positions by Kennedy. Clearly some of those designated as 
Independent or party unknown were also Republicans. A later sur- 
vey reveals that of 220 high Eisenhower officials, 58 stayed in gov- 
ernment service. These were mostly Republicans. As The New York 
Times of August 11, 1961, noted, General Bedell Smith was the only 
high official carried over by Eisenhower from the Truman adminis- 
tration. Possibly Mr. William Martin, the Chairman of the Federal 
Reserve Board, should be included. Of the 58 who remained in the 
Kennedy administration, 33 remained in the same post, 9 obtained 
other jobs and 16 career government employees received routine 
reassignments. 1 Kennedy showed no such hostility to members of 
the other party as Eisenhower, or rather as Eisenhower's political 
supporters, did. Kennedy resisted political pressures more than 
Eisenhower, and hence was more likely to get the best man for the 
job irrespective of party. In the campaign he announced his inten- 
tion to get the best possible men, regardless of political affiliations. 
The Eisenhower administration not only cleared out virtually all 
top personnel of the Truman administration, but the exodus spilled 
over to many purely technical staff members. In one instance an 
Assistant Secretary refused to allow the leading expert in the 
country to contribute to a scientific symposium because he was 



Appointments under Kennedy 27 

deemed by the Assistant Secretary to be a well known Democrat. 

Sherman Adams describes the great pressure Eisenhower was 
under to clean out all the Roosevelt-Truman holdovers. In one in- 
stance, a Truman holdover as of December, 1953, who served as 
head of a Kansas City office of a federal department was a source of 
annoyance to the Republicans. But it was soon discovered that the 
reasons for the holdover were: ( 1 ) The Republicans wanted to keep 
him out of campaigns; (2) he was very able; (3) his daughter was 
married to the son of a leading Republican politician. 2 

Before making any comments on the origins of the men in the 
top posts, I present a further analysis of the officials taken from 
government in Table 3. 

TABLE 3 

Former Government Officials Appointed by President Kennedy in 
Early Months of Administration 

Assistants to Kennedy 7 
Assistants to congressmen, directors of Congressional 

committees and former congressmen 18 

From state and local governments 23 

Federal departments and agencies 22 

Same position in Eisenhower administration 19 

89* 
* Origins of several not clearly designated. 
Sources: See Table 2. 



Origins of the Kennedy appointments reflect his creed. There 
are genuine dangers in having a preponderance of businessmen in 
government. First, interests of businessmen and government often 
conflict. Second, the special qualities and policies ( for example, con- 
centrated authority, speed of action, salesmanship, ruthless accept- 
ance of market forces, maximization of profits through minimizing 
outlays and maximizing receipts) often making for success in busi- 
ness, when applied to government frequently result in disaster. 
This does not mean that businessmen and their associates, such as 
lawyers, cannot often serve government well. In the Eisenhower ad- 
ministration, such men as Gates, Folsom, Cutler and Rogers con- 
tributed much to the welfare of the nation (but on the average the 
performance of businessmen was not good ) ; and there is every ex- 



28 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

pectation that such men as Dillon and McNamara, with experience 
in business, will prove to be highly successful as administrators. 

One other aspect of the influx of businessmen into Washington 
under Eisenhower should be noted. They tend to stay a relatively 
short time. When they learn enough to begin to be effective, they 
leave. Necessary frustrations and delays in government, fear of los- 
ing their status in their corporations, and perhaps poor choices by 
the President, so often dependent on the recommendations of the 
Business Advisory Council primarily tethered to large business in- 
terests — these explain in part the costly turnovers. 

Kennedy has revealed a high regard for eggheads. He wants 
men with ideas around him, but idea men who also have a bent for 
the practical. In contrast to Eisenhower, who even in his public 
statements expressed scorn for the eggheads, Kennedy enjoys hav- 
ing these men around him. He is attentive to new ideas and because 
he needs new approaches, he listens attentively to brilliant academi- 
cians, and likes to discuss issues with them. I recall an early discus- 
sion in Hyannisport on the Dollar Problem with the President-elect. 
The problem was clearly one he had had no opportunity to explore. 
Yet in one hour he showed a remarkable grasp of the essentials of 
this difficult problem. One finds it difficult to imagine Eisenhower in 
a give-and-take discussion with men of the caliber of McNamara, 
Sorenson, Bundy, Galbraith, Schlesinger and Wiesner. 

Indeed Kennedy's trust of the academic is unique. As Richard 
Rovere noted, Continental countries which put a high premium on 
learning and theoretical understanding make their intellectuals 
prove themselves before they receive high-level assignments. Even 
Roosevelt did not entrust his eggheads with the highest responsi- 
bilities. "Mr. Kennedy remains, nevertheless, the first President to 
staff a government with men whose primary qualifications are their 
knowledge of problems, their understanding of theory and their ca- 
pacity for logical analysis. . . ." 3 

The academicians have a special qualification for high govern- 
ment positions. Their responsibility is to work on behalf of the 
national interest. The possibility of conflict of interest is small in- 
deed. Moreover, by training and aptitude these men and women are 
interested in spawning new ideas, and in reflecting on those of others. 
When has there been as great need for the abandonment of the 
pedestrian? 

A heavy reliance on those previously in government service is 



Appointments under Kennedy 29 

also a feature of the Kennedy policy of mobilization of human re- 
sources. Here again the possibility of disinterested policy is much 
greater than for businessmen in government. Moreover, those who 
come from government are more practiced in the art of government 
than are businessmen. They know of the inevitable delays and how 
to progress nevertheless; they have had experience in dealing with 
civil servants, conflicting interests in government and particularly 
with legislators. 

One other feature of the Kennedy policy deserves comment, 
namely the numerous appointments to his administration of assist- 
ants of congressmen, executive directors and other experts for Con- 
gressional committees. The heavy drain on congressional assistants 
may greatly impair the efficiency of congressional operations; but it 
undoubtedly contributes much to the effective relations of the Presi- 
dent with the Congress. These men know their way around Capitol 
Hill. 

An aspect of the contrast of personnel policies comes from a 
study of the new occupations of 34 top-level appointments pre- 
viously in the Eisenhower administration. 4 The return to business, 
finance and law and the virtual desertion of government is clear. 
Column 1 reveals where they went. But a survey of 220 Eisenhower 
officials (cols. 3 and 4) reveals a much larger per cent in govern- 
ment posts. Whereas 3 per cent of the top 34 remained in govern- 
ment, 28 per cent of 220, on the average of lower rank, remained in 
government. (See Table 4) 

The contrast of appointment policies between Eisenhower and 
Kennedy is just as clear in the top 30 as in the top 200 appointments. 
For Secretary of State, Kennedy chose Dean Rusk, a long-term 
government servant and more recently a foundation president. Eisen- 
hower selected one of the leading Wall Street lawyers, one indeed 
who was very much interested in foreign policy. For Secretary of 
the Treasury, Eisenhower's choice was a tough, personable and able 
head of a large corporation whose general philosophy was derived 
from Spencer, Gladstone and Herbert Hoover. The less government 
spending, the better. Somehow in Secretary Humphrey's view gov- 
ernment dollars are unproductive and private dollars highly pro- 
ductive. 

Kennedy's choice was Douglas Dillon, a high-ranking official in 
the State Department under Eisenhower who had already estab- 
lished an enviable reputation as Ambassador to France and in the 



•30 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

State Department as one who was determined to learn what he 
could about the problems that concerned him. He had been a 
source of irritation to the Treasury, for he had strongly supported 

TABLE 4 

Later Careers of 34 and 220 Top Eisenhower Executives in 1961 

(1) (2) (3) (4) 
Per cent Per cent 

Business and finance 12 34 40 20 



Law 


7 


21 


33 


16 


Academic 


5 


15 


21 


10 


Press, public relations, etc. 


3 


9 


20* 


10 


Kennedy administration 


2 


6 


f 


— 


Work with Congress 


2 


6 


4 


2 


Government 


1 


3 


58 


28 


Foundations or other philanthropic 










organizations 


— 





8 


4 


Miscellaneous 


2 


6 


21 


10 



Total 34 100 205$ 100 

* Includes 15 in private consulting. 

f Included under Government. 

| Includes 15 with no immediate plans; only 205 classified. 

Sources: Col. 1 adapted from Business Week, June 17, 1961. 

Col. 3 adapted from Congressional Quarterly, June 30, 1961. 

foreign aid programs to which the Secretary of the Treasury would 
respond not with argument but with a categorical "no." As the 
Congressional Quarterly says, there was much unhappiness among 
Democrats when Dillon was chosen. 5 I recall that Messrs. Samuel- 
son, Galbraith, Schlesinger and I spent a few hours one day trying to 
come up with a good name among Democrats for this post that we 
might suggest to the President-elect. We failed. Dillon has increas- 
ingly won the respect of Democrats. He is not blind to modern 
theories of fiscal policy as both Secretaries Humphrey and Ander- 
son were. In a speech to the Press Club on June 20, 1961, he de- 
fended the modest deficits of 1961 and 1962 as necessary costs of a 
recession; and he envisaged a rate of growth in a few years that 
would provide adequate public revenues out of large potential tax 
receipts in a growing economy, and ultimately a tax cut. Since I 
have served as Senior Consultant to the Secretary, I can say that I 



Appointments under Kennedy 31 

have never known a high official who was so anxious to learn, who 
sent back memos with the note — "I have read the enclosed with 
interest." On one occasion I assembled 25 outstanding economists 
to discuss issues that interested the Secretary. Except for a call from 
the White House and a short meeting with an Ambassador, the 
Secretary was in attendance throughout the two days and joined in 
the discussion with top-flight economists on equal terms. Dillon 
promises to become the Alexander Hamilton of the twentieth cen- 
tury. He sees the need of public services, is attentive to new ideas 
and yet retains a brand of conservatism that serves him well in an 
operating agency such as the Treasury. It is the task of the Council 
of Economic Advisers to press the unorthodox, and the Treasury 
with its peculiar responsibilities to yield only part of the way. 

What of the others? Secretary McNamara is a businessman with 
egghead proclivities. His tendency to ask questions irritates many 
in the Pentagon, but he promises easily to outperform Wilson, Mc- 
Elroy and Gates, all of whom had many good qualities; and he 
should acquire the status of two distinguished Secretaries of De- 
fense ( War ) in the twentieth century, Baker and Stimson. 

The Secretary of Labor, Arthur Goldberg, has already made an 
impression on the country. Whether he will achieve more than Eisen- 
hower's Mitchell remains to be seen, for the latter performed well. 
In Commerce, Secretary Hodges is not likely to be taken in by the 
superbusinessmen in the Business Advisory Council nor to over- 
rule scientists in defense of a business interest. Hodges has a much 
better understanding of modern economics and the responsibilities 
of a Commerce Secretary than Weeks or Mueller; the latter in fact 
revealed a brand of economics that Hoover would not have adhered 
to in the 1920's. 

In agriculture, Orville Freeman will understand much better 
than Benson that the farmers cannot be left exposed to the free 
market forces. But Benson deserves much credit for a display of 
courage and honesty at high levels that is not to be found often. 

RibicofF is far above Mrs. Hobby as Secretary of Health, Educa- 
tion and Welfare. He understands government and his philosophy 
is close to the President's. He is not likely to fight aid for education 
or medicine nor to commit the unforgivable errors such as in the 
distribution of polio vaccine that finally drove Mrs. Hobby from 
Washington. It remains to be seen whether RibicofF will equal the 
performance and have the courage of that unusual, able servant, 



32 }0t THE ECONOMICS OF THE POLITICAL PARTIES 

Mrs. Hobby's successor, Marion Folsom, who had to contend with a 
reluctant President in the area of welfare. 

At the UN, Governor Stevenson, one of the great statesmen of 
modern times, seems to me to be considerably more talented and 
more understanding of the needs of the uncommitted nations than 
Henry Cabot Lodge. The President will make effective use of 
Governor Stevenson. 

One point cannot be made often enough. President Kennedy 
will not appoint a Secretary of the Interior who boasts that this is a 
businessman's administration, and one who is more likely to dispose 
of the nation's resources than use them. Douglas McKay was an 
unfortunate choice. Seaton was much better. Udall has great 
promise. Robert Kennedy, a man of unusual ability, courage and 
promise, has started well. His superiority over Brownell is clear. 
Rogers, who raised the level of the Judiciary, offers much higher 
standards for Robert Kennedy to match. 

It may be said in general that Kennedy would not appoint a 
Commissioner of Internal Revenue who thinks the income tax is a 
scandal or a Housing Administrator who is against public housing or 
an Aid Administrator who is against foreign aid — as Eisenhower 
did.* 

* Time (January 12, 1962) estimates that of 28 political appointees to 
ambassadorships, half came from education, law or journalism, while nine 
more came from other government jobs. 



4. The tie-in with big business 



Big Business in Control 

There are many other evidences of the intimate and special rela- 
tionships between the Eisenhower administration and the business 
community. 

For example, in the first two years in office before the President 
put a secrecy lid on the information, it was found, according to the 
U.S. News 6- World Report of February 4, 1955, that the President 
held a series of stag dinners at the White House at which he tried 
to pick the brains of those attending. Of the 555 guests, 294 were 
businessmen, 9 were farmers and farm leaders and 8 were union 
officials. Of the remainder, 81 were administration officials; 51, 
editors, publishers and writers; 30, educators; 23, Republican party 
leaders; 18, scientists, artists and sportsmen; 16, old friends from 
military days; 10, heads of foundations or charities; 6, church 
leaders; 5, Eisenhower relatives; 4, state and local officials. 

One result of the close relations with Big Business is, of course, 
excessive recourse to these men and women for financial aid during 
the campaigns. Thus in 1952 President Eisenhower's campaign re- 
ceived $94,000 from the Rockefeller family, $74,000 from the 
du Ponts, $65,000 from the Pews of Philadelphia, $36,000 from the 
Mellon family. 

In 1956, according to the Gore Committee, the Republicans 
spent nearly twice as much as the Democrats. The major report 
stated: ". . . examination of the facts . . . disclosed . . . heavy 
campaign expenditures by persons affiliated with big business, and 
large vested interest and by wealthy individuals . . . largely to 
Republican committees and candidates." 

Thus the Republicans received three times as much in contribu- 

33 



34 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

tions of $5,000 or more, and from individuals contributing $500 or 
more, Republicans received almost eight times as much as the 
Democrats. 1 

In a speech at the Seventh International Education Conference, 
on April 24, 1956, Stevenson said: Thomas Jefferson marked this 
[difference between the Democrats and the Republicans] 132 years 
ago when he said: 

Men by their constitution are naturally divided into two parties; those 
who fear and distrust the people, and wish to draw all their powers from 
them into the hands of the higher classes, and those who identify them- 
selves with the people, have confidence in them as the most honest and 
safe . . . depository of the public interest. 

In Michigan on March 10, 1956, Stevenson said, referring to the 
President's tendency to turn power over to his associates, 

. . . And I call your attention to the further fact that these associates 
have virtually all been selected from a single group in our society — busi- 
ness. It is not that we Democrats are hostile to business, even big busi- 
ness. But the President is pledged to serve the general welfare. And if 
that means anything, it means all the interests whose welfare is involved. 
Yet the present cabinet is composed of men who have pledged themselves 
over and over again to the special service of big business. 

Not only is there a danger that too-frequent calling on wealthy 
businessmen may result in unwise policies, but often important 
businessmen do not make effective government servants. There are 
many reasons for this. The big corporation executive is used to giv- 
ing orders and getting things done quickly. But, in government, 
there necessarily is delay because diverse interests have to be pro- 
tected. The big business executive who comes into government be- 
comes impatient, and often this creates more trouble than good. An 
example of this is the case of Lewis Strauss, who certainly was an 
able businessman and in many ways effective; but he was too over- 
powering and hence proved to be a liability. For example, in his 
campaign against Dr. Robert Oppenheimer he antagonized numer- 
ous scientists, causing Dr. Vannevar Bush to say that the morale of 
scientists was "so low, that while they will not refuse to serve, they 
will serve without enthusiasm and without fruitful inspiration." 
Columnists Joseph and Stewart Alsop called Strauss a threat to the 



The tie-in with big business 35 

partnership between American government and American scientists. 

Some top businessmen tend to become terribly cocksure in their 
judgments. Thus Secretary Weeks fired the head of the Bureau of 
Standards for refusing to approve a battery additive that a manu- 
facturer wanted to sell on the market. Apparently he considered this 
a blow to free private enterprise, and he was unaware of the large 
body of regulatory laws to protect the consumer. The Secretary had 
to revise his decision following a nation-wide protest. Clarence 
Randall, one of the most articulate of American businessmen, served 
as White House advisor and dismissed Sputnik as a "celestial 
bauble." 

When he did not appoint businessmen, President Eisenhower 
often appointed generals and admirals. While *a certain number of 
military men can be helpful in government, in general they share the 
conservatism of the big businessmen and also soon find that methods 
of getting things done in the military do not exactly fit government. 
President Eisenhower went far beyond President Truman in the 
number of military people appointed to high places. 

By 1956, the President had become sensitive to criticism of the 
millionaires in his Cabinet and similar appointments. In a prepared 
conference with a panel of his supporters, on October 12, 1956, the 
following colloquy occurred. 

Isadore Siegal — my name is Isadore Siegal. . . . You have a lot of 
people that are big shots in the Cabinet. I want to ask you, Mr. President, 
do you think that all the working people are alike, like in the big business? 

Now, I have three or four very successful businessmen in the Cabinet. 
My friend in the Defense Department is spending something like $40 
billion a year of our money. Most of that goes into, or a great deal of it 
into procurement of things, tanks and planes and guns and ammunition 
and all these modern weapons. 

Who would you rather have in charge of that, some failure that never 
did anything, or a successful businessman? 

I got the head of the biggest company I could go to, General Motors, 
and said, "Will you come in and do this for us?" 

I have got another businessman of that same kind in charge of the 
Treasury because he is the kind of man that only just doesn't hoard money, 
he uses money for the good of America, to build jobs. 

Why shouldn't he be a businessman? [In view of the Secretary's aus- 
tere spending policies, I bring this to the attention of the reader.] 



36 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

Big Business and Small Business 

Perhaps because the administration was sensitive to the frequent 
charges of big business control, it used to talk frequently and tire- 
lessly about the problems of Small Business. But while the President 
pleaded for Small Business, he cut the appropriation of the Federal 
Trade Commission, which protects Small Business, in his first bud- 
get by 18 per cent. 

Similarly, in his Economic Report, the President said that the 
government has discharged its responsibility "by preserving an ac- 
tively competitive environment and assisting new and small busi- 
ness." Again, "Monopolistic tendencies must be curbed whenever 
they appear." L> But when he found that Mr. Barnes, the Assistant 
Attorney General, was an excellent man at trust busting, he pro- 
moted him upstairs to a judgeship. 

During the Eisenhower administration, the trend toward con- 
centration continued at an accelerated pace. The 1955 Federal Trade 
Commission Report on corporate mergers and acquisitions does not 
reassure us: "Since 1949 the pace of important merging acquisitions 
has been rising; in 1954 the number reported in financial manuals 
was three times that of 1949 and just slightly less than the number 
reported for each of the years 1946 and 1947 when merger activity 
reached the post-war peak." In this connection, it is of significance 
that in the midst of an epidemic of mergers the President's budgets 
called for a decline of relevant expenditures of 7 per cent in the 
fiscal years 1954-1956, and of legal outlays to fight monopoly, a de- 
cline of 16 per cent in FYs 1954 and 1955. Again, of the 60 members 
of the Attorney General's Committee to Study the Antitrust Laws, 
22 were corporation lawyers engaged in fighting government on 
antitrust matters. 

In its seventh annual report, the Select Committee on Small Busi- 
ness of United States Senate wrote: 

Concentration of economic power as a result of merger activity sharply 
stepped up its already alarming pace during 1956. . . . Reasonable ob- 
servers can agree that, should this merger tide continue unchecked, the 
source of our nation's vitality and prosperity — the competitive character 
of this economy — is certain to disappear with disastrous consequences, not 
only to small business but to all Americans. 3 

A Senate Committee recognizes that many mergers are justifi- 
able on economic grounds, but legislation is necessary to help differ- 
entiate those to be supported from those not to be. 4 



The tie-in with big business 37 

Thus, despite the gestures of solicitude, Small Business has 
steadily lost ground. One of its great problems is the heavy corpo- 
ration tax. A large corporation can finance itself largely through re- 
tained profits, and since 1947 about 80 per cent of physical expansion 
was paid for out of retained profits. The high corporation income 
tax makes it very difficult for the small corporation to expand, since 
small businesses do not have access to alternative sources of funds. 5 
In A Report on Federal Tax Policy, the Joint Committee on Eco- 
nomic Report, on February 5, 1956, said: 

... It is a widely held view that small and new businesses have lim- 
ited access to credit and equity capital from external sources as compared 
with larger, better established firms. The growth requirements of smaller 
new companies frequently involve more extensive reliance on internal 
resources, particularly retained earnings, than in the case of other com- 
panies. A corporation income tax structure which does not unduly limit 
the financial resources required to finance the growth of large established 
companies, therefore, may prove extremely burdensome in this respect to 
small and new companies. A greater differential in effect in rates ap- 
plicable to small and large corporations . . . should be given careful 
consideration. 

The President's Cabinet Committee had suggested tax relief for 
small business and Congressional committees seemed to be in favor 
also, but on July 15, 1957, the President, in a message to the Chair- 
man of the House Ways and Means Committee, retracted: "It now 
appears that the excess of income over disbursements in fiscal year 
1958 will be so small that no action should be taken by the Congress 
at this time which will involve any substantial tax reduction for 
anyone. . . ." 6 

Numerous technical studies reveal the relative losses of small 
businesses as their command over credit and capital declines. 7 

It is also true that, despite some apparent efforts on the part of 
the government to divert contracts from Big Business, Small Busi- 
ness consistently loses ground. The government, embarrassed by 
this tendency, has tried to conceal some of the facts. 

The Senate Armed Services Committee reprimanded the De- 
partment of Defense for issuing misleading reports concerning the 
listing of corporations with large government contracts. The revised 
series of 1955 did not list General Motors with $6.6 billion of con- 
tracts on December 31, 1954, Chrysler Corporation with $2,088 
million, Westinghouse Electric with $1,146 million, and at least 42 



38 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

other large companies with substantial contracts. The Senate Com- 
mittee summarized its conclusions regarding the Department of De- 
fense as follows : 

Had the report series not been canceled it would have been unneces- 
sary for the two congressional committees to make special requests that 
current data be developed. And thus there would have been no occasion 
for the issuance of the different report by the Defense Department in 
May 1955 which produced such misleading information. It seems clear 
that the revised method of presenting data in this last report destroyed 
the continuity of the series and made it impossible to determine who 
currently are the largest defense contractors. Thus important information 
to which Congress and the public generally were entitled was not avail- 
able to them. 8 

Small Business did not receive a share of government contracts 
commensurate with its place in the economy, and this holds par- 
ticularly for the military contracts. Most contracts were still ne- 
gotiated, a method favoring the large company. 9 

A select committee on small business in 1959 also noted that 
out of $22 billion spent in 1958 by the Department of Defense for 
procurement, $3^ billion (or 17.1 per cent) went to Small Business, 
a decline from 19.8 per cent in the fiscal year 1957. The Department 
of Defense provided 63 per cent of all prime contracts from July, 
1950, to December, 1957, to the one hundred largest companies, 
and during a more recent three-year period, January, 1955, to 
December, 1957, their share was 68 per cent. Of $4 billion for re- 
search and development paid by government in fiscal 1958, only 
$138 million (or 3.7 per cent) went to Small Business. 

Corruption 

It is of some interest that despite Eisenhower's celebrated pledge 
that his administration would be as clean as a hound's tooth, it has 
displayed glaring breaches of the moral code, mainly as a result 
of the application by some businessmen of low business ethics to 
the public service. 

In an interview of October 22, 1952, General Eisenhower said: 
"How can there be any fear that I will use only 'a lick and a promise' 
method in cleaning out corruption in Washington when I have so 
often and so emphatically pledged 'top to bottom clean-out.' " 

It was not long before President Eisenhower was confronted with 



The tie-in with big business 39 

corruption in his own administration and party. On February 12, 
1953, Wesley Roberts, Republican National Chairman, was charged 
with accepting a 10 per cent fee worth about $11,000 for selling 
a building to the State of Kansas, which the state already owned. 

A committee of the Kansas Legislature found Roberts had "de- 
liberately and intentionally" violated the intent of the Kansas Lobby 
Law in the building peddling deal. But nevertheless President 
Eisenhower, Nixon and GOP congressmen, senators and Cabinet 
members inscribed a silver tray "to Wes Roberts, whose integrity 
of purpose, keenness of mind and instinctive kindness have endeared 
him to all of us. . . ." 

Perhaps the most striking case was that of Harold Talbott, Secre- 
tary of the Air Force. While in that post, he had earned $132,000 in 
profits from a firm in which he had a 50 per cent interest. He per- 
suaded defense contractors to do business with this firm. Despite 
his promises in the campaign to punish the culprits, the President 
allowed Talbott to resign and even awarded him the Defense De- 
partment's highest civilian medal. 

In Columbus, Ohio, on September 23, 1952, the President had 
said that there were good men in the Republican party ready and 
waiting to serve: ". . . They in turn will be your watchful guardians 
of honesty and of your tax money." 

The Dixon-Yates episode is so well known that little need be 
said about it here. It is clear that Wenzell, as an advisor to the 
Budget Bureau, helped spawn the idea of sales of power by Dixon- 
Yates — a private utility interest — to the AEC, the financing to be 
done by the First Boston Corporation, with which Wenzell was 
associated. This dual capacity of Mr. Wenzell was known to high 
officials of the Bureau of the Budget, though they kept this informa- 
tion from the President. Nevertheless, Hughes, the Budget Director, 
testified on June 27, 1955, before the Senate Anti-Trust Sub-Com- 
mittee that 'Tie [Eisenhower] knows, of course, that we have an 
expert [Wenzell] working on this thing and he knows his name and 
his connection and all about him." In this particular instance, the 
administration admitted that the Dixon-Yates provision of power 
would cost about $90 million more to the government than if TVA 
had provided it. Moreover, though the AEC had no interest in this 
problem, nevertheless the AEC was to sign the contract for power 
to be used not by the AEC but by the City of Memphis. More on 
the Dixon-Yates affair later. At this point let us note that the gov- 



40 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

ernment, in its backhanded attempt to punish TVA, suffered one of 
its most costly defeats. 

There were other areas where less than the cleanliness of the 
hound's tooth prevailed. If space permitted, I would discuss the 
conflict of interests of Mr. Cross, 10 the Interstate Commerce Com- 
missioner; Mr. Strobel, 11 the Public Works Commissioner; Mr. 
Mansure, 12 the General Services Administrator — serious infractions 
of the moral code in each instance. 

The unfortunate Goldfine case, which involved the President's 
top assistant, put the President, of course, in a most difficult posi- 
tion. 13 At a news conference of May 4, 1956, the President had said: 

If anyone ever comes to any part of the government and claiming 
some privileges or even to as low as an introduction to an official he 
wants to meet on the basis that he is part of my family of friends, that 
has any connection with the White House, he is to be thrown out in- 
stantly. ... I can't believe that anybody on my staff would ever be 
guilty of an indiscretion. But if ever anything came to my attention of 
that kind, the individual would be gone. 

When Adams finally went, it was months later and on his own 
initiative. 

The President himself has accepted presents which a more sensi- 
tive Chief Executive would have rejected. Mr. Childs has written: 
". . . Even when the sum total of the gifts made to him [Eisen- 
hower] for his Gettysburg farm had been revealed, among the 
more than $40,000 in everything from tractors to blooded cattle, 
the public seemed to accept this as though this was part of the 
tribute due a hero. . . ." 14 

In Chapter 25 of his Eisenhower, The Inside Story, Donovan, 
discussing Cabinet meetings, gives a frank and honest discussion 
of the problems created by government advisors serving without 
compensation — the well known WOC's.* Some of these modern 
dollar-a-year men have abused their position by operating for their 
own interest while they are supposed to be advisors to the govern- 
ment. Here is an example (BDSA is Business and Defense Admin- 
istration ) . 

Specific instances where BDSA had hired WOC's of dubious qualifi- 
cations were brought to the subcommittee's attention. The vice president 

* WOC = WithOut Compensation. 



The tie-in with big business 41 

of Continental Can Co., Inc., testified before the subcommittee with re- 
spect to a WOC furnished by the company as Deputy Director of the 
Containers and Packaging Division of BDSA, that had he known fully of 
the nature of the duties of a Deputy Director, he never would have 
recommended him for the job. 

Another example follows : 

. . . Mr. Clay's entertainment consisted primarily of lengthy lunches 
and cocktail parties for business contacts, representatives of other cor- 
porations, and Government officials. . . . 

Mr. Clay, upon arriving in Washington, proceeded to "monitor or 
follow through" his company's application. He contacted Government 
officials handling the application, checked on its progress, advised his 
company as to the status of it, and advised them as to additional informa- 
tion to be supplied or further action to be taken by the company in 
respect to the application. He entertained frequently Government offi- 
cials who were responsible for the company's application, and such en- 
tertainment was done at company expense. These actions were taken by 
Mr. Clay with the full knowledge and at the behest of National Starch 
Products, Inc. 

On June 26, 1952, National Starch Products, Inc. received approval 
for most of the accelerated amortization desired. 15 



Conclusion 

Successful businessmen have a legitimate place in government. 
The government should call on them for public service. Many have 
served well: for example, Secretary Folsom of HEW, Secretary 
Mitchell of Labor, and Robert Cutler, Presidential Assistant. But 
when businessmen begin to dominate government, then some ques- 
tions are in order. The interests of Big Business in government con- 
tracts, in merger activities, in the disposal of natural resources, in 
tax legislation, and so on, often conflict with those of the nation. 

There has been, to say the least, a conflict of private and public 
interests in all these areas, and in some instances corruption. The 
Dixon-Yates affair; the Al Sarena case, where under the guise of 
mineral exploitation, public lands were turned over for cutting 
timber; the Talbott affair, where the Secretary of the Air Force 
saw no wrong in diverting contracts to his firm from which he was 
still drawing profits; the Mansure case, where the chief procurement 
officer for civilian supplies was paying political debts by turning over 



42 }0, THE ECONOMICS OF THE POLITICAL PARTIES 

contracts to his political angels — these are a sampling of what has 
happened. I shall say nothing here about the concentration of gov- 
ernment contracts on Big Business, nor the failure of President 
Eisenhower to reprimand publicly any of the offending executives — 
a surprising outcome in view of the outcry raised over a few mink 
coats in 1952. 

Excessive mergers, a reluctant antimonopoly policy, the excess of 
talk over action in maintaining the position of Small Business, and 
an overidentification of big business interests with the best interests 
of the nation as a whole — these all reflect the operations of an 
administration too wedded to the interests of Big Business. 



5. The little man and the big interests 



yj In a speech at Los Angeles, California, on May 10, 1956, Gover- 
nor Stevenson said: "From President Hoover's veto of the TVA to 
President Eisenhower's veto of the Farm Bill, from Teapot Dome to 
Dixon-Yates, it seems to me perfectly clear that the Republican party 
under General Eisenhower remains, as it has been throughout the 
recent past, the party devoted to the service not of all the people 
but of special interests." x This chapter is an assessment of the poli- 
cies of the Eisenhower administration toward big interests and the 
little man. 

Growth and Instability of the Currency 

We seek both maximum economic growth and price stability. 
But unfortunately our arsenal of weapons does not always yield 
precise results. We sometimes have to choose between growth and 
stability of the currency. 

In recent years, one of the major differences between the parties 
has been the greater interest shown by the Democratic party in 
growth of the economy and the absorbing interest of the Republican 
party in stability of the currency. Time and again, throughout nu- 
merous hearings, Republican representatives have stressed the all- 
consuming importance of an anti-inflationary policy, and they have 
pushed this policy far enough to reduce the growth rate and to help 
bring about a recession. 

For example, in his opening statement, Secretary Humphrey 
before the Senate Finance Committee's study of the "Financial 
Condition of the United States in 1957" said that the objective of 
the fiscal and economic policy was to reduce deficits, balance the 
budget, meet the huge cost of defense, properly handle the burden 

43 



44 }0 THE ECONOMICS OF THE POLITICAL PARTIES 

of debt and obligations, check the menace of inflation, work toward 
the earliest possible reduction of the tax burden, and encourage the 
initiative of our citizens. These — not the growth of the economy — 
were the primary aims.- 

Where the emphasis is put upon the stability of the currency 
rather than on growth, the result is likely to be a smaller rate of 
growth and not necessarily a smaller degree of inflation. On the 
whole, the argument against inflation is especially designed to help 
those who live on income from savings. Inflation tends to erode 
the value of these savings, and this point was made time and again 
by leaders of the administration. But on the whole the savers come 
from middle- and high-income groups, and the position of the low- 
income groups will not be damaged as much by inflation as that of 
the higher-income groups. It is well known that those with incomes 
of $3,000 and possibly $4,000 do not have savings and, in fact, they 
spend more than their income. 3 

Once growth is sacrificed to the primary objective of rigid price 
stability, the result is likely to be increased unemployment. This 
means, of course, a heavy burden upon those least able to bear it. 
Inflation, on the other hand, tends to affect adversely those whose 
incomes do not rise as rapidly as price levels. The greatest sufferers 
are, of course, the old. Since they are largely covered under Old 
Age and Survivor's Insurance, an escalator clause to adjust to rising 
prices the incomes of those living on old-age annuities would elimi- 
nate the most unfortunate effect of a creeping inflation. Only a few 
hundred millions of dollars per year would be needed to offset a 2 
per cent inflation per year. On the whole, I am inclined to the view 
that where we can maintain the maximum growth with a modest 
amount of inflation, the interests of the low-income groups are 
better protected than if we try to stabilize our price level with ex- 
cessive zeal, and discourage growth and bring about substantial 
unemployment with a heavy incidence of costs upon a few million 
families. President Kennedy has wisely sought relative, not absolute 
price stability. 

Growth rate is important for many reasons. The greater the 
growth, the larger the income and, therefore, the more available 
for our needs for consumption as well as for investment. In this 
connection, it can also be pointed out that, on the whole, the Eisen- 
hower administration has tended to favor increased investment 
rather than increased consumption as the main objective of economic 



The little man and the big interests 45 

policy. Yet we all know that one of the serious problems of main- 
taining an adequate demand for our highly productive economy 
is to maintain consumption at an adequate level. There is no use 
turning out more and more investment goods if the buying power 
is not available. 

The higher the rate of economic growth, the more money will be 
available to meet the needs of the people that cannot be met through 
private spending. In other words, a more rapid rate of growth means 
much larger income and increased capacity to spend for schools, 
roads, health, urban redevelopment and similar services on which 
we are underspending now. For example, the Rockefeller Report 
shows that as compared to the $86 billion government purchases 
of goods and services in 1957, government purchases of goods and 
services with a growth rate of 4 per cent might yield $153 billion 
in 1967. The Rockefeller Report brings out dramatically the differ- 
ence between the rise of the gross national product under differing 
assumptions of growth. 4 President Kennedy seeks a growth of 4Vi 
per cent a year through stimulation of investment and consumption. 

Many economists and others in the Democratic party are in- 
clined to be critical of our rate of growth in recent years. Had we 
achieved our maximum, our gross national product would have been 
much larger in recent years. 5 The average rise was 4.6 per cent from 
1947 to 1953, but only 2.3 per cent from 1953 to 1959. 

Perhaps the most potent reason for a high rate of growth of the 
gross national product is our struggle with communism. Mr. Allen 
W. Dulles made this clear at the Forty-sixth Annual Meeting of 
the United States Chamber of Commerce, when he said: 

Whereas Soviet GNP was about 33 per cent of the United States in 
1950, by 1956 it had increased to about 40 per cent, and by 1962 it may 
be about 50 per cent of our own. This means that the Soviet economy has 
been growing, and is expected to continue to grow through 1962 at a 
rate roughly twice that of the economy of the United States. 

According to a State Department Bulletin ( April 27, 1959 ) , Mr. 
Allen Dulles gave 9.5 per cent as the annual rate of Soviet industrial 
growth in the years 1951-1958, in his speech of April 8, 1959. At 
this rate of growth, it would not be very long before the Soviet 
Union's gross national product would be as large as ours, though a 
growth rate of 5 per cent in this country would delay this achieve- 
ment by the Russians ( cf . Ch. 22 ) . 



46 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

Distribution of Income 

Under the Democratic regime, and particularly for the period 
from 1939 on, where we have reasonably precise figures, there is a 
strong indication of the improved distribution of income: that is, 
a more equitable distribution of income. 

In the February, 1954, issue of Review of Economics and Sta- 
tistics (published by Harvard University), four members of the 
staff of the Department of Commerce, including George Jaszi, who 
is one of the world's leading experts on income analysis and who 
has been responsible for this work in the Department of Commerce, 
presented the first full-scale examination of the change of distribu- 
tion of income in this country since the Depression thirties. 

The major result shown by this study is a greatly improved dis- 
tribution of income. Among the explanations of this improvement 
are the following: 

1. Full employment policies. 

2. The rise in the proportion of income going to wages and 
salaries and farmers, and particularly to low-income workers. 

3. A rise in the importance of transfer income — for example, 
Unemployment Compensation. This kind of income goes proportion- 
ately to the low-income groups. 

Obviously farm, labor, Social Security, minimum wages and 
public investment policies contributed to these results. Moreover, 
the lessened degree of inequality did not preclude a vast expansion 
of output, which suggests that effects on motivation were not serious. 
One by-product of these policies has been an increased capacity of 
old couples to maintain their homes, and hence the average numbers 
in the low-income household tended to be reduced, and therefore 
the income per capita in low-income households has tended to rise 
more than proportionately. The more equitable distribution is evi- 
dent not only on the basis of dollars of current purchasing power 
received but also when allowance is made for taxes and price 
changes. 

For consumer units the percentage increase of mean income from 
1935-1936 to 1950 was 57 per cent for all and 78, 81, 75, 62, and 34 
per cent for lowest to highest quintile and 17 per cent for the top 
5 per cent. This improvement did not continue in the 1950's. 6 



The little man and the big interests 47 

Eisenhowers Policies Do Not Favor Low-Income Groups 

It is not necessary to discuss here the many policies that have 
on the whole not favored the low-income groups, for these policies 
generally are discussed elsewhere in the book. Let me mention 
several very briefly. Under welfare, the administration depended 
increasingly upon insurance, which is financed by taxes on the 
low-income groups and not out of general revenues. The zeal for 
putting increasing burdens on state and local government, where 
the necessary resources are not available to carry out required serv- 
ices, results in a heavy burden on the low-income groups. For, as I 
show elsewhere, state and local taxes bear on low-income groups 
much more than federal taxes do. 

The 1954 tax program, which was an important tax-reduction 
program and the only one in the 1950's, favored, as we show else- 
where, the relatively high-income groups much more than the low- 
income groups. Minimum wage legislation was accepted with great 
reluctance, and the administration fought in 1955 a rise of minimum 
wages from 75^ to $1.00. Similarly in 1959-1960, the administration 
was dragging its feet on the proposal to increase the minimum wage 
from $1.00 to $1.25. 

Under the Eisenhower administration, large advances were made 
in housing. But in general the gains go to relatively high-income 
groups. Those with incomes of less than $3,000 to $4,000 obtain 
little help in housing under that administration's program. The 
housing program, with federal guarantees the main weapon, has 
become the support of the relatively small proportion who can afford 
to finance houses costing $12,000 or thereabouts. In 1957 the average 
value of property guaranteed by the FHA had risen under Section 
203 of the housing legislation to $14,261, or 43 per cent since 1952. 
Per capita income had risen only 40 per cent as much. 

Monetary, farm and small business policies, as we note elsewhere, 
have favored the big man, not the small. 

Labor Legislation 

In general, it may safely be said that President Eisenhower and 
his associates have not been strong supporters of labor unions. 7 
Presidential Assistant Howard Pyle said: "The right to suffer is one 
of the joys of a free economy, just as the right to prosper is." 8 



48 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Secretary of the Treasury Humphrey was quoted as saying: "An 
unemployment figure of 4 million, while it would be deplored, 
would be a relatively low figure." 9 Secretary Wilson reflected a view 
held by some members of the administration when he said: "I've 
got a lot of sympathy for the people where a sudden change catches 
them — but I've always liked bird dogs rather than kennel dogs 
myself. You know, one that can get out and hunt for food rather 
than sit on his fanny and yell." 

In his speech before the American Federation of Labor on 
September 17, 1952, Eisenhower said: 

I will not support any amendments which weaken the rights of working 
men and women. In seeking desirable amendments, I will ask the advice 
and suggestions of all groups, public, management and labor. And, gentle- 
men, I assure you that this invitation of mine will be genuine and in good 
faith. It will not be one of those empty theatrical gestures so often made 
in recent years. ... If I have any executive responsibility, labor will 
have an equal voice with all others. . . . 10 

Yet, despite this and similar statements, one of the major charges 
made against President Eisenhower and his administration was the 
manner in which the President changed the National Labor Rela- 
tions Board (NLRB) so that it became much more favorable to 
the position of the employer than to that of the employee. 

In view of Eisenhower's record of appointments to the NLRB and 
his support of the Landrum-Griffin Bill in 1959, his position with 
regard to organized labor cannot be characterized as friendly. 

This is particularly borne out by analysis of the labor legislation 
of 1959. No one can doubt that there was great need for labor 
legislation. A minority of trade union leaders had indulged in 
practices that certainly required corrective legislation. Agreement 
was general that there was need for greater regulation in the in- 
ternal affairs of the trade union. 

The Kennedy Bill was the best balanced of four important bills 
in its treatment of labor; the others were much more antilabor. 
The ultimate legislation followed to a considerable extent the admin- 
istration bill. 

A bill supported by the administration was introduced into the 
House as the Landrum-Griffin Bill, and was substituted for the 
Kennedy Bill in the discussions. 11 Originally Senator Kennedy had 
hoped to include in his bill a certain number of sweetening amend- 



The little man and the big interests 49 

ments to the Taft-Hartley Act, but he was unable to do so. The 
administration led in the fight to weaken labor's position in re the 
internal government of the trade unions; and also in attacking 
secondary boycotts and picketing, and supporting other amendments 
to Taft-Hartley aimed at restricting labor. 12 

Conclusion 

We can conclude that Eisenhower's policies have not favored 
the small man. 

The excessive emphasis on stability of the currency, balancing 
of the budget against the larger objectives of growth and treatment 
of recessions, the modest welfare programs, with their stress on 
financing by those who profit, the farm and tariff policies that favor 
the strong rather than the weak, the attempts to exempt employer- 
pension funds from disclosures, the loading of the NLRB with mem- 
bers with a background of prejudices in favor of employers, the 
strengthening of the Taft-Hartley Act, despite earlier promises not 
to weaken the bargaining position of labor — all these point to eco- 
nomic policies oriented toward the welfare of employers and higher 
income groups. Recent trends in the distribution of income add fur- 
ther support to this general position. 



6. The Kennedy creed 

and that of his opponents 



Kennedys General Position 

In the campaign of 1960, Kennedy said little about his value sys- 
tem or ideology. I found only four general statements in his cam- 
paign speeches that spelled out his ideology. 1 Yet in the campaign 
he had made 62 speeches, 274 shorter talks (called remarks), issued 
43 statements, held 9 press conferences, and 10 question-and-answer 
periods. These are exclusive of radio and television speeches. 

In a speech before the Liberal party on September 14, Senator 
Kennedy said a liberal is "someone who looks ahead and not behind, 
someone who welcomes new ideas without rigid reactions, someone 
who cares about the welfare of the people— their health, their 
housing, their schools, their jobs, their civil rights, and their civil 
liberties. . . ." 2 

On September 27, in Canton, Ohio, the candidate agreed that 
the difference between the parties was not the ends but the means. 
(This is a surprising admission because in fact there were important 
differences in goals.) At this point he repeated from a speech of 
Franklin Roosevelt, ". . . Better the occasional faults of a govern- 
ment living in the spirit of charity than the consistent omissions of 
a government frozen in the ice of its own indifference." 3 

Senator Kennedy also wanted to assure businessmen. Hence on 
October 20, he said: 

And both candidates are also equally opposed to recession, unjustified 
or unnecessary government intervention in the economy — to needlessly 
[italics mine] unbalanced budgets and centralized government. I do not 
believe that Washington should do for the people what they can do for 
themselves through local and private effort. There is no magic attached 
50 



The Kennedy creed and that of his opponents 51 

to tax dollars that have been to Washington and back. [The last sentence 
is almost a quote from President Eisenhower.] 4 

Finally, in Oklahoma City on November 3, 1960, through an 
attack on Vice-President Nixon, he exposed his own creed : 

. . . and I cannot recall a single piece of progressive legislation of benefit 
to the people of this country, that he [Nixon] has sponsored, fought for, 
stood for, identified himself with, whether it is social security, whether it 
is aid to the farmers, whether it is dredging our rivers, whether it is pro- 
viding a better life for our people. Their monument is higher interest 
rates. Their monument is all the things that might have been done that 
were not done. Their monument is a declining United States in the eyes 
of the world. . . . 5 

One cannot get a clear idea of the President's ideology from the 
more than half million words publicly issued during the campaign — 
at least not from the statements of ideology. From his past record 
and his proposals for action — on employment, prices, housing, edu- 
cation, medicine, defense, recession, and so forth — his creed is 
clear. The government has important responsibilities that it cannot 
and will not shirk. As against Eisenhower and Nixon ( and we shall 
see this more clearly in Nixon's statements), Kennedy clearly con- 
tends that the Federal Government has to play a larger part. 

Perhaps the best and fullest statement of the President's creed 
appeared in an article, "We Must Climb to the Hilltop," in Life of 
August 22, 1960. Here the Senator commented on the lack of leader- 
ship, the tendency to be soft with rising material gains ("A man 
with extra fat will look doubtfully on attempting the 4-minute 
mile . . ."); and he emphasized evolution not revolution. 

"No single one of these four challenges — survival, competition, 
peace, prosperity — sums up our national purpose today. The crea- 
tion of a more perfect union requires the pursuit of a whole series of 
ideals. . . ." 

After a careful survey of Kennedy's record, James Burns, in his 
brilliant book on Kennedy, points out that Kennedy's liberalism is 
not easy to define. Much of the New Deal liberalism, in Kennedy's 
view, has become entrenched in our life and other parts are now 
outmoded or irrelevant. Burns quotes Kennedy as follows : 

What we need now in this nation most of all is a constant flow of New 
ideas. . . . We cannot obtain new ideas until we have a government 



52 ^t THE ECONOMICS OF THE POLITICAL PARTIES 

and a public opinion which respect new ideas and the people who have 
them. . . . Our country has surmounted great crises in the past, not 
because of our wealth, not because of our rhetoric . . . but because our 
ideas were more compelling, and more penetrating, and more wise and 
enduring. [Kennedy stressed] the revolutions in our cities, on the farm, 
in the birth rate, in life expectancy, in technology ... in energy; in 
our standard of living, in weapons development, in the underdeveloped 
nations, and in nationalism. 6 

Allan Nevins, in an introduction to a volume of Kennedy's 
speeches and statements, aside from pointing to the reversals of 
historic trends — with the Republicans prepared "to shelter conserva- 
tism behind States' rights rampants," and the Democrats much more 
a federal action party — has this to say about Kennedy: 

. . . The complacency and apathy which a plodding Republican lead- 
ership, a Presidential reliance on general staff methods, have fostered, 
have been against tough-minded analysis. . . . Mr. Kennedy's main 
general object is to put an end to this Laodicean drift. . . ." 7 

Perhaps nowhere is the difference between Eisenhower and 
Kennedy or between recent Republican and Democratic ideology 
more apparent than in the attitude toward the Presidency. Eisen- 
hower overstressed the division of authority among the three 
branches of the government; delegated authority excessively to 
interdepartmental committees, accepted the verdict of an agreed- 
upon conclusion of these committees and in general tended to down- 
grade the Presidency. 

Rut Kennedy has different ideas of the Presidency. His support 
of the Neustadt thesis of a strong President is well known. In reply 
to a question by John Fischer, he spurned the Eisenhower approach 
and stated that he would make decisions on the basis of various 
alternatives presented to him, not accept a compromise among his 
lieutenants. No one could imagine the President acquiescing to an 
outburst like Secretary Humphrey's in the budget crisis of 1957, 
once the Secretary had accepted the President's final decision on 
the Rudget — even if this were a melodramatic accord between the 
President and the Secretary thus to highlight their disappointment 
at the Rudget. 

Perhaps the clearest statement by the Senator was made before 
the National Press Club on January 14, 1960. In contrast to the 



The Kennedy creed and that of his opponents 53 

Eisenhower period when "needs and hopes have been eloquently 
stated, but the initiative and followthrough have too often been left 
to others," Kennedy estimated what the public wanted in 1960: 

. . . They [the public] demand a vigorous proponent of the national 
interest — not a passive broker for conflicting private interests. They 
demand a man capable of acting as the Commander-in-Chief of the great 
alliance. . . . They demand that he be the head of a responsible party 
... a man who will formulate and fight for legislative policies. . . . 

Today a restricted scope of the Presidency is not enough. For beneath 
today's surface gloss of peace and prosperity are increasingly dangerous, 
unsolved, long-postponed problems. . . . 

... he [the President] must above all be the Chief Executive in 
every sense of the word. 

... It is the President alone who must make the major decisions 
of our foreign policy. . . . And even domestically, must initiate policies 
and devise laws. . . . 8 

The Nixon Creed 

During the campaign Nixon was much more articulate than was 
Kennedy in the sense that he stated his ideology in an outright man- 
ner. The thrust of his position is to depend on the Federal Govern- 
ment as little as possible. 

The way of progress "is not through expanding the size and 
functions of government, but by increasing the opportunities for 
millions of individual Americans [and to] . . . form policies which 
will encourage and stimulate the productive and creative energies 
of 180 million free individual Americans. . . ." 9 

In a speech in Birmingham, Alabama, Nixon contrasted the 
Democratic approach of spending billions by the Federal Govern- 
ment to the Republican approach of "increasing the opportunities for 
investment and contributions of millions of individual free Ameri- 
cans." Instead of starting with the Federal Government, he would 
begin at the other end of the spectrum, with the individual, local 
and state governments. 10 

"They say: 'Send your money to Washington and we will spend 
it for you/ And we say: 'You send it to Washington only when 
you think we can spend it better than your state can or you can 
for your own benefit/ " n 

"We find, throughout the [Democratic] platform, federalism runs 



54 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

rampant in nearly every significant area of local, state, and national 
life, ranging from housing to education, to youth training, to city 
administration, to national resources, to labor management relations, 
to agriculture — all floated on a sea of taxpayers dollars." 12 

Spurring economic growth "will require leaders whose policy 
is to accent the traditional strengths of our free economy — initiative 
and investment, productivity and efficiency. ... It will mean 
stressing what 180 million Americans can do, not what government 
can do for them. . . ." 13 

On his support of the oil depletion allowance, Nixon defended 
himself on the grounds that a few millionaires were an incidental 
by-product. By stimulating creative activity, he would thus make 
the many rich. 14 

"But Washington should not do things which people would rather 
do themselves. Washington shouldn't spend a dollar that the people 
would rather spend themselves at the local level to accomplish 
their own ends." ir> 

In Bridgeport, Connecticut, Nixon was somewhat less reluctant 
to oppose federal spending. But even here he reminded his listeners 
that "every time we spend a dollar in Washington, that it's a dollar 
that the people don't get to spend at home. . . ." 16 

Nixon's creed was a rather negative one: he was against Big 
Federal Government. But it was at least consistent with his voting 
record. He persistently voted against or opposed advances in hous- 
ing, health, social security, education and resource development, 
whenever differences on these issues really arose between the par- 
ties. In 1954, he even warned against defense expenditures on the 
grounds that the ultimate effect would be bankruptcy. 

Yet when one compares his ideological statements with his 
various white papers in the 1960 campaign and precise treatment of 
the issues, one finds little consistency between his creed and his 
statements of policy. In contrast, Kennedy was for a greater role 
for the Federal Government in his general philosophical position and 
in the specific programs proposed. 

Here, for example, are some details from Nixon's specific pro- 
grams. "We must have federal leadership in housing. America's 
national housing policy for the 1960's must encompass not only 
assistance in financing homes and apartments but also must involve 
entire communities. . . . [My italics.] 



The Kennedy creed and that of his opponents 55 

"The area of urban housing and renewal presents us with a clear 
need for prompt federation action." 

Then Nixon admits the large contributions of the Housing Act 
of 1949 (which he had opposed) and comments on the ample supply 
of dwelling units. But then he says: "We must review and bring up 
to date public housing programs. . . . We can improve the present 
program by providing for single family as well as multiple unit 
projects. . . ." 17 

No one will say that Nixon had been a great leader in the 
programs for improving our natural resources. He had, for example, 
been consistently hostile to TVA. But on October 29, 1960, appeared 
his Natural Resources Study Paper. 

The solution of the water problem "requires an incessant and 
vigorous effort, undertaken by organizations both non-Federal and 
Federal, to impound water, irrigate land, control floods, and find 
an economical way to convert saline and brackish water into fresh." 

On the issue of new starts in water conservation, Nixon boasted 
of the 49 new starts under Eisenhower though he admitted that 24 
were initiated by the Congress. The no-start program had been 
initiated by Truman, he pointed out. In the five fiscal years 1949- 
1953, Truman had recommended only five reclamation starts. (But 
the no-new starts were related to the demands of the Korean War. ) 

On water power, "the federal government should, however, 
vigorously proceed to construct multipurpose projects such as the 
great upper-Colorado storage project." But Nixon is silent on the 
Hell's Canyon project which was turned over for private exploita- 
tion, the espousal of the Colorado River project by Eisenhower 
being explained in no small part by the fact that the private utilities 
did not find this profitable for exploitation. 

"The federal government must continue to make great provision 
for recreational opportunities on public domain and forest lands." 18 

Nixon also proposes further action to preserve our forests, fish and 
wildlife and to extend conservation programs. 

In education, Nixon's record is not particularly impressive. At 
one crucial point, his tie vote killed an important education bill. 
Yet in the campaign he went far. Not only did be approve of sub- 
sidies for construction — he had failed to fight for the Eisenhower 
bills — but he now would go beyond Eisenhower. He would favor 
"a program of substantial federal assistance to our public and pri- 



56 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

vate colleges and universities in the form of loans at low rates of 
interest and also in the form of matching grants." (This goes way 
beyond Eisenhower's program.) He also would expand loans and 
would initiate a scholarship program — Eisenhower, once defeated 
on scholarships, remained silent. Nixon again goes beyond the 
Eisenhower administration and his own creed in proposing tax 
credits or deductions for tuition paid. (This is in fact a wasteful 
program, for it provides tax help whether it is needed or not.) 
Beyond Eisenhower's program, he would also provide matching 
grants for medical facilities for teaching purposes. 

In short, Nixon was against big government and his past voting 
record reflects this philosophical approach. But his concrete recom- 
mendations on housing, social security, resource development, and 
health and education in the 1960 campaign were at odds with both 
his voting record and his philosophical position. Which is the real 
Nixon? 

A Republican Deviator 

Perhaps we should not concentrate on Eisenhower and Nixon 
in order to understand Republican ideology. Senator Goldwater 
and Governor Rockefeller also have the White House in view. Let us 
start with Goldwater. No rightist Democrat occupies the high 
position in the political world held by Goldwater. Undoubtedly it 
would be difficult to find much difference of viewpoint between 
Goldwater and Senator Byrd, but the latter, however influential in 
the Senate and however forthright and able, has never had a large 
national following. 

My observations on Goldwater are based on his newspaper 
column, his book, a debate I had with him at the Harvard Law 
School Forum and an ensuing exchange in his columns and the 
Washington Post. 19 

Goldwater's creed is so well known that little need be said here. 
The less government the better; nonessential expenditures (and 
these include apparently all welfare outlays) should be reduced 
by 10 per cent per year until they are eliminated; socialism through 
welfarism is even more deadly than socialism through nationaliza- 
tion; the Sherman Act should be applied to labor monopolies as 
well as to business monopolies; the need for federal aid for educa- 
tion is not proved, for in fact these outlays have been rising faster 
than GNP; progressive taxes are confiscatory; federal outlays on 



The Kennedy creed and that of his opponents 57 

welfare simply mean taking money by the Federal Government 
and then giving the states' own money back to them. Obviously 
Gold water would go back to the days of Spencer and McKinley. 
Hoover seems like a progressive. 

Goldwater presents his statistics in a manner to buttress his 
articles. Taxes are one-fourth, not as he says one-third of income. 
He minimizes the transfers involved in federal outlays ". . . because 
a few states have not seen fit to take care of their school needs, it 
is not incumbent upon the Federal Government to take up the 
slack." He does not point out that per capita income in Mississippi 
is one-third that of the richest states, and her proportion of children 
of school age much greater and her expenditures on education in 
relation to income much higher than in the rich states. 

What is especially striking are his statistics on federal expendi- 
tures. 

In the last ten years, according to Goldwater, purely domestic 
expenditures have increased from $15.2 billion in fiscal 1951 to a 
proposed $37.0 billion in fiscal 1961 — an increase of 143 per cent. 

Again, however, the increase in GNP, which was roughly 40 per cent 
over the past ten years, is not comparable to a 143 per cent increase in 
federal spending. . . . 
[Note the 143 per cent is now all federal spending.] 20 

Here is what I find: 

TABLE 5 

Federal Expenditures and GNP, 1951 and 1961 





Fiscal Fiscal 






Year Year 


Per cent 




1951 1961 


Rise 




($ Billion) 




All federal expenditures 


44 79 


80 


All excluding major national 






security 


21.5 33.0 


53 


Cash payments — all 


46 98 


113 


GNP 


306 500 (est.) 


63 



Note that GNP rose 63, not 40 per cent, and more than non- 
security outlays. 



58 }0, THE ECONOMICS OF THE POLITICAL PARTIES 

Perhaps of more interest is the period 1952-1960, for Goldwater 
is highly critical of the Eisenhower Administration for not having 
kept its Morningside Heights promise of a $60 billion budget. The 
relevant years are FY 1953 to FY 1961. 

Rise of federal expenditures $74. IB to $78. 9B = + 7% 

Ibid. Exclusive of major natl. sec. 23. 8B to 33. OB = +39% 

GNP 356 to 500 (est.) = +40% 

Source: From Economic Report of the President, 1961; and Economic Indi- 
cators, May, 1951. 

These figures reveal that the spending "orgy" is much less than 
Goldwater assumed. 

What is especially worth emphasis is the point that total federal 
expenditures under Eisenhower rose much less than GNP — Gold- 
water gives the opposite impression. 

Another Republican Deviator: Nelson Rockefeller 

Governor Rockefeller deviates from average Republican creed 
almost as much toward the Left as Goldwater to the Right. 21 

On most issues Rockefeller sounds much more like a Democrat 
than a Republican. On the issue of a strong executive, he argued 
that "the present structure of the Federal Government is still not 
geared to support the President in developing and executing inte- 
grated policy, thoughtfully and purposefully, either in the complex 
areas of national security and foreign policy, or in the equally com- 
plex area of domestic policies." 22 

Governor Rockefeller, unlike most of his party leaders, early con- 
centrated on the importance of growth. The Rockefeller brothers 
panels even estimated GNP and per capital GNP for 1966 and 1975 
on the basis of continued growth at current (1956) rates. (Indeed 
the panel underestimated communist growth. ) 23 

But in analyzing the manner of accelerating growth, Rockefeller 
comes much closer to Republican dogma than to Democratic. The 
five ways are: increased capital investment to accelerate growth, 
curbing inflation and recession, elimination of featherbedding, a 
more effective farm program and elimination of racial discrimina- 
tion. 24 No mention is made here of such Democratic principles as 
the contribution of education, improved housing, health or federal 
expenditures generally, nor of any measures taken to assure a level 
of consumption to match the increasing output of the nation. 



The Kennedy creed and that of his opponents 59 

This excerpt comes from the political statement of Governor 
Rockefeller, not from the panel reports where the relation of growth 
and public spending is clearly presented. At points the discussion 
might as well have been by Mr. Leon Keyserling, who did so much 
to spread the gospel of growth. The panel insists that growth is a 
necessary condition for adequate social capital. Without substantial 
growth, social programs will have to be curtailed or they would take 
a larger share of income. But note the word of caution in the presen- 
tation for the Republican Campaign Committee: "Since most of 
the dynamic thrust of our growth comes from private activities, there 
is danger that too large and too rapid diversion of funds to public 
expenditure will react adversely on the entire economy." 25 

The Rockefeller panels early in 1958 showed an awareness of 
the importance of growth equal to that of any Democrat. In their 
view in the ten years ending 1967, GNP in 1957 dollars would rise 
from 434 to 583, 642 and 707 billion dollars at growth rates of 3 
per cent (average of 1870-1930), 4 per cent (1947-1957 rate) and 
5 per cent respectively. 

It is in this framework of adequate growth that the Rockefeller 
panel presented estimates of public expenditures in 1967 ( projecting 
from 1957) that must have greatly shocked most Republican leaders. 
Here are a few items. 

TABLE 6 

All Government Public Expenditures in 1957 Dollars 

($ Billion) 

1957 1967 







Actual 


Low 


High 


Total cash expenditures 




114 


170.9 


203.0 


National security 




46.0 


60.0 


70.0 


Education 




13.0 


24.0 


30.0 


Welfare 




20.0 


38.5 


45.0 


Public works 




9.5 


20.5 


27.0 


Source: Prospect for America, p. 


325. 









We can afford the defense programs essential for our survival. In doing 
so, however, unless we achieve a 5 per cent growth rate, we shall have 
to hold back otherwise desirable expenditures in the government field 
and keep the growth of private expenditures below a level commensurate 
with our aspirations. 26 



60 }0t THE ECONOMICS OF THE POLITICAL PARTIES 

In such areas as defense and welfare, Rockefeller again sounds 
like an advanced Democrat. Against the Nixon line that the United 
States is the strongest nation in the world, Rockefeller insisted that 

. . . the decline in our relative military power has become plain not 
only in terms of strategic retaliatory forces but also in terms of tactical 
forces for countering local aggression. . . . Our power to retaliate after 
a Soviet attack is increasingly and seriously inadequate. 27 

It is not surprising then that the panels would criticize the in- 
adequate appropriations for defense under Eisenhower. 

These increases will run into billions of dollars and must rise substantially 
in each of the next few years [and] . . . will require successive addi- 
tions on the order of $3 billion each year for the next several fiscal years. 28 

In programs for urban redevelopment, in a medical program for 
the old under Social Security, in the extension of federal disability 
insurance, in the setting of federal minimum standards for unem- 
ployment compensation, in the recommendation of disability insur- 
ance for all states, of federal aid for operation of medical schools, of 
large expenditures for education and a greater contribution of the 
Federal Government to education — in all of these Governor Rocke- 
feller would not find himself at odds with President Kennedy or 
even with Senators Humphrey, Douglas and Clark. These federal 
programs will "increase both in scale and in variety. It is a stark 
fact that there are educational problems gravely affecting the 
national interest that may be soluble only through federal action." 29 

Rockefeller's economics as reflected in the Prospect for America 
and (though somewhat less so) in A Republican Approach to the 
Great Issues is good Democratic economics. Perhaps he stresses in 
his philosophical statements the great contributions of private enter- 
prise as against government a little more than leading Democrats 
would, but essentially on the basis of his creed the Governor is in 
fact a Democrat, not a Republican. 

Summary 

It is clear that an understanding of Kennedy's creed is to be 
had more from his record and his concrete proposals than from his 
philosophical statements. Nixon is more explicit in stating his ideol- 
ogy. One might have expected the reverse in view of Kennedy's 



The Kennedy creed and that of his opponents 61 

penchant for discussions with thoughtful scholars. But one is at 
loss to discover Nixon's genuine philosophy: his record and state- 
ments of creed point in one direction; his proposals in 1960 in an- 
other. The Republican creed also includes the views of Goldwater, 
a deviator from one side, and Rockefeller who easily could be 
covered under the Democratic umbrella. 



7. Platforms and achievements 



^1 In the later chapters of this book I devote much space to the 
promises made by Eisenhower and the actual policies pursued. I 
relied largely on statements made in the campaigns of 1952 and 
1956. In a general way these should be consistent with the plat- 
forms. Yet though the candidate may be able to choose the chief 
drafters of the platform and the broad policies to be presented in 
the platform, the candidate may not be entirely happy about the 
platform. Disagreements may arise because the candidate disap- 
proves the views expressed in the platform or because he knows that 
he will not be able to deliver. 

Here is one example. The 1960 Democratic platform had this 
to say on growth: 

We Democrats believe that our economy can and must grow at an 
average rate of 5 per cent annually, almost twice as fast as our average 
annual rate since 1953. We pledge ourselves to policies that will achieve 
this goal without inflation. 

President Kennedy undoubtedly finds this promise a little em- 
barrassing. First, because in his first year, hampered by a recession 
already evident in the latter part of 1960, the administration will 
be fortunate indeed if growth reaches 3 per cent. Second, the 5 
per cent figure is a very high one for an advanced economy. The 
best ten-year average in the twentieth century was about 4 per 
cent. Even in his press conference of June 27, 1961, when the 
President was answering Soviet claims of equality of output in 
1970 of the U.S.S.R. and the U.S.A., he set a goal of only 4i/ 2 per 
cent. Third, the promise of substantial growth and no inflation is 
62 



Platforms and achievements 63 

a source of embarrassment. On several occasions the President has 
wisely said that the objective is maximum growth and minimum 
inflation. No sane economist would be unhappy, for example, with 
a 5 per cent rate of growth and a 1 per cent rise of prices. Our 
record over a long period of time has been, roughly, 3 per cent rise 
of output and a 1+ per cent increase of prices. At our current state, 
it becomes increasingly difficult to achieve a 4 or 5 per cent rate of 
growth. 

The objective of a platform is to win votes. Hence the appeals 
are likely to be to the masses of voters. Consider the Republican 
1956 platform. One finds a few ideological statements to reassure 
the high-income groups that usually support the Republican party. 

In all those things which deal with people, be liberal, be human. 
In all those things which deal with people's money, or their economy, 
or their form of government, be conservative. 

We have balanced the budget. We believe and will continue to prove 
that thrift, prudence, and a sensible respect for living within income ap- 
plies as surely to the management of our government's budget as it does 
to the family budget. 

But the major part of the platform is devoted to promises on 
current issues and reflects the divisions between parties in the 
preceding years. At one point it might just as well be the Demo- 
cratic platform. The party will not only balance the budget, but 
also will provide the services and reduce taxes. 

One claim made is that the nation has reached the highest eco- 
nomic level of all times and the most widely shared benefits. This 
is effective propaganda; the average voter does not realize that as 
long as the economy grows the output reaches the highest level each 
year. On distribution, the party is especially sensitive as a result of 
the criticisms of the 1954 tax legislation, generally interpreted by 
Democrats as handouts to the higher-income groups primarily. 
Hence the platform now says we want "further reductions in taxes 
with particular consideration for low and middle income families." 
The Republicans have not shown any great disposition to deliver 
on this, at least not before 1961. In fact their emphasis is on tax con- 
cessions to business and high-income groups. But one must realize 
that a platform of a party in control of the executive but not of 
the Congress, can have even less promise than the Democratic 



64 }0 THE ECONOMICS OF THE POLITICAL PARTIES 

platform of 1960 where control in both branches is lodged in the 
Democrats. 

Among the other points made by the Republican platform were 
the following: 

1. We supported the free distribution of the Salk Vaccine. Thus 
the party hopes to make the public forget the errors committed 
by the administration and especially by Mrs. Hobby. 

2. In education, the administration was especially suspect, for 
the President had failed to follow through on his construction bills. 
Hence the party can boast only of the largest conference on educa- 
tion and promise later education legislation. 

3. In housing, the administration had not been as enthusiastic 
as the Democrats in pushing federal legislation. The Democrats 
pressed hard. Hence the platform boasts that "we have supported 
measures that have made more housing available than ever be- 
fore. ..." 

4. In medicine, the administration found support nowhere for 
its reinsurance program, and generally was confronted with in- 
creases in medical research outlays above the administration's pro- 
posals by the Congress. But the platform repeats the support of 
reinsurance and adds that "We have asked the largest increase in 
research funds ever sought in one year to intensify attacks on cancer, 
mental illness, heart diseases and other dread diseases." 

5. Agriculture was one of the party's tough problems. Farm 
income was declining while total income of the nation was rising. 
The party boasted of its soil bank program, of disposal of $7 billion 
price-depressing surpluses and of a recent improvement of farm 
income. Though the party was to work toward full freedom, it was 
nevertheless also going to get farm income up. One could not blame 
the platform writers for being silent on the reduction of parity from 
100 in 1952 to 83 in 1956 or the virtual doubling of the cost of a 
program for stabilization of farm prices and farm incomes from 
F.Y. 1953 to F.Y. 1956. 1 

The 1956 Democratic platform was an entirely different kind of 
document. It consisted, as did the 1952 Republican platform, in large 
part, of criticism of the party in power. The Republicans, according 
to the platform, were captives of large business; their excessive 
concern for finance had impaired our security position and made 
necessary a policy of massive retaliation; the hard-money policies, 
the tax handouts to the rich, the slow rate of growth, the deteriora- 



Platforms and achievements 65 

tion of the farmer's position, the trends toward monopoly, a decline 
of 60 per cent in per capita welfare outlays — these and other as- 
pects of policy received the attention of the Democratic platform. 

But the Democratic platform was more than a series of rebukes 
directed at the Eisenhower administration. In contrast to the Re- 
publican platform, there were many specific promises in the event 
of a Democratic victory. By 1960 the Democrats would bring a $500 
billion GNP and a 20 per cent or more rise in the standard of living. 
( Actually under Eisenhower GNP rose to $493 billion in 1956 dollars 
by 1960, but per capita disposable income, a useful guide of the 
standard of living, rose by only 3 per cent. ) For agriculture, there 
would be 100 per cent of parity. 

Fearful of spending, the Republicans were silent on programs 
likely to cost money. But the Democrats were more generous though 
they would also "achieve a truly balanced federal budget." The 
Democrats would bring full employment, equitable tax revisions, 
the reduction and elimination of poverty, full parity of incomes and 
living standards for agriculture, revision of Taft-Hartley, greater 
expansion of business based on rising consumption, expansion of 
international trade, the provision of all necessary classrooms, the 
construction of needed new homes, especially for the low and high 
income groups, increased benefits under Old Age Assistance and 
old-age and survivors insurance, a substantial expansion of hospital 
facilities and medical research, and a doubling of expenditures for 
resource development and conservation, revision of tax rates inclu- 
sive of a rise of exemptions from $600 to $800, and a reduction of 
interest rates. 

Did the Democratic party keep faith with the public from 1956 
to 1960? Since Eisenhower was the victor, perhaps they should not 
be held to their promises. Certainly by 1960, and in some instances 
by 1961, they had not delivered. Farmers' income, for example, was 
still far below parity. With control of Congress, the Democrats tried 
to put over most of their suggested programs. They clearly were 
more anxious to spend for education, health, housing, resource de- 
velopment and social security than were the Republicans. But the 
Presidential veto was an obstacle as was the independence of the 
Federal Reserve. Interest rates rose rather than declined from 1956 
on. Some fears of inflation in the administration, the inflation com- 
plex of the Federal Reserve, deficit financing by the government, all 
contributed to the high rates. 



66 ^t THE ECONOMICS OF THE POLITICAL PARTIES 

In 1961, the Democrats had control of both houses and the 
executive. Their platform promises should carry much weight. At 
present writing it does seem that the Democrats will do better in 
1960-1964 than in 1956-1960. They have already extended our 
defense program; succeeded in getting through an advanced hous- 
ing program; raised minimum wages to $1.25; provided additional 
benefits under Social Security and emergency unemployment com- 
pensation; pushed through an Area Development Program. 

In some crucial areas, however, the platform notwithstanding, 
the Kennedy Administration faces obstacles. The Ways and Means 
Committee is essentially a conservative body and pays little atten- 
tion to the President's wishes or platform promises. A medical 
program for the aged under Social Security, and some of the modest 
tax revisions proposed by the Kennedy administration are not ac- 
ceptable to this powerful committee; and an adequate agricultural 
program is confronted by all kinds of obstacles. Again, an improved 
program of foreign aid — and in particular back-door financing and 
commitments over several years — faces severe opposition for various 
reasons. Back-door financing — that is, by-passing appropriation 
committees — is increasingly opposed; the unpopularity of foreign 
aid in Arkansas, the home state of the chairman of the Foreign 
Relations Committee; the reluctance of Congress to commit for 
more than one year; and finally the many past mistakes of foreign 
aid — these are among the reasons why it is difficult to keep the 
promises on Foreign Aid in the 1960 Democratic platform. But 
nevertheless, the final 1961 legislation marked substantial advances. 
Finally, the religious issue, and perhaps excessive vacillation in the 
executive, seem to have fouled up the education bill. 

What of the 1960 Republican platform? In defense the platform 
praised Republican performance and condemned the mistakes of 
the Democrats, and, despite the influence of the economizers under 
Eisenhower, adopted the views on finance in relation to defense 
similar to those of the Democrats. 



Under the Eisenhower-Nixon Administration, our military might has 
been forged into a power second to none. . . . 

. . . Never again will they [Polaris submarine and ballistic missile] 
be neglected, as intercontinental missile development was neglected 
between the end of World War II and 1953. 

There is no price ceiling on America's security. . . . 



Platforms and achievements 67 

The defense provisions in the platform reflect the influence of 
Nelson Rockefeller, as do the items on growth. Here the Republicans 
accept the growth thesis as they had consistently averted it in the 
past. But if the acknowledgment of its significance is clear, the 
means are still the Republican ones — not federal spending for edu- 
cation, housing and health, but, "We therefore accord high priority 
to vigorous economic growth and recognize that its mainspring lies 
in the private sector of the economy. . . . We reject the concept of 
artificial growth forced by massive new federal and loose money 
policies. . . ." 

Defensive on its agricultural policy, the platform was not too clear 
on what they were going to do. ". . . The Republican Party will 
provide within the framework of individual freedom a greater bar- 
gaining power to assure an equitable return for the work and capital 
supplied by farmers. ..." 

It promised "new programs to improve and stabilize farm family 
income . . . [and] price supports at levels best fitted to specific 
commodities. . . ." 

Vulnerable on its natural resource policies, the platform boasted 
nevertheless that "the past seven years of Republican leadership 
have seen the development of more power capacity, flood control, 
irrigation, fish and wildlife projects, recreational facilities, and asso- 
ciated multi-purpose projects than during any previous administra- 
tion in history. . . ." 

In education the emphasis was on its importance, on the deter- 
mination that our schools shall not become second best. An interest 
was expressed in a school construction program by the Federal 
government, though little enthusiasm was shown even in this pro- 
gram by the administration other than to introduce such a bill. De- 
spite Eisenhower's attempt to end the federal program to assist in 
construction for college housing, the platform promised action here. 

The platform boasted of gains in old-age insurance under Eisen- 
hower, of improvement in unemployment insurance and numerous 
advances in housing. It is of some interest that in 1961, the Repub- 
licans in the Congress voted against the administration's bill on 
housing which in a general way followed the Republican platform 
proposals, and also spiked the education bill, which was certainly 
nearer to Republican proposals than no legislation. 

On the big issues of fiscal policy, the differences in the parties 
would not be suspected from a reading of the platforms. The Re- 



68 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

publican platform acknowledges that, except in times of war or 
economic insecurity, expenditures should be covered by revenues. 
"In order of priority, federal revenues should be used: first, to meet 
the needs of national security; second, to fulfill the legitimate and 
urgent needs of the nation that cannot be met by the States, local 
governments or private action; third, to pay down on the national 
debt in good times; finally, to improve our tax structure." 

Except for the fact that somewhat more emphasis is given to 
stabilizing the currency, justifying new expenditures and defending 
the independence of the Federal Reserve, this part of the platform 
might just as well have been written by the Democrats. But it seems 
far removed from the Republican policies in the 1950's or 1961. 2 

In his superb book, 3 Theodore White writes that "Platforms are 
a ritual with a history of their own, and after being written, they are 
useful chiefly to scholars who dissect them as archaeological remains. 
. . . But in actual fact, all platforms are meaningless: the program 
of either party is what lies in the vision and conscience of the candi- 
date the party chooses to lead it." 

I think this is going too far. Indeed, the platform exaggerates the 
contribution of the party and underestimates that of the opposition. 
In the quest for votes, the writers omit failures and inflate achieve- 
ments. And in an analysis of promises and performances, one will 
often find large differences. The explanation of the failures to per- 
form as promised rests on several factors: the President may not be 
in complete agreement with the platform — for example, the Demo- 
cratic platform goes too far on some issues for the President; the 
Congress may be in disagreement on some provisions and hence 
may obstruct programs proposed in the platform. Even one crucial 
committee may block the party — for instance, in 1961 the Rules Com- 
mittee on Education and the Ways and Means Committee on Health 
Insurance for the Aged. The writers of the platform will try to re- 
flect the views of the President and the Congress, but can do so only 
in the most general way. One difficulty in following up on platform 
promises is that the platform is based more on the views of the 
Presidential candidate than on those of the Congress. The platform 
of the party in power is particularly difficult to write, and notably 
in 1960. An attempt had to be made to reconcile the Eisenhower 
policies with the more advanced views of the Rockefeller-Nixon 
coalition. This was not easy, yet support had to be given to all three 
factions. A party out of power can of course not deliver. A party in 



Platforms and achievements 69 

control of the executive but not of the Congress can be held respon- 
sible only for its proposals to the Congress, and the follow-up. But 
the platform of a party in control of both branches of government 
should carry much weight and the party should be held accountable 
for unfilled promises. 

In a general way, the platform reflects the party. Even the 1960 
platform of each party in a general way conformed to the past 
policies of the party and the expected ones. Consider the 1960 
Democratic platform. I do not find a single important proposal of 
the Kennedy administration that is clearly inconsistent with the 
platform. And I find at least 38 important items which are now 
(August, 1961) in the works. At least nine important acts have had 
Congressional approval. Indeed, as noted above, several important 
proposals have run into difficulties despite strong support by the 
President. Others — and particularly in the natural resources area — 
take much time. 

In some instances the Congress or the President refuses to go 
along with the platform — as the fact that a ten-year antislum pro- 
gram has in fact become a four-year program. The proposal for re- 
ducing depletion allowances, for obvious reasons, has not even been 
suggested to the Congress. Raising farm income to parity will be a 
major accomplishment even if achieved by 1964. The attack on 
monopoly has begun; but how far it will go only time will tell. The 
elimination of provisions in federal labor legislation that encourages 
right-to-work laws is not going to be easy — and in part because of 
strong opposition by Southern Democrats. In some areas of the 
platform, remarkable progress has been made in a short period of 
time — the overhaul of the whole foreign aid program and defense, 
aggressive treatment of recessions, the housing program and de- 
pressed areas legislation. 

All this does suggest that the platform is more than a ritual. The 
party that fails to heed its demands is* likely to experience much 
criticism and loss of votes. But one should, for the reasons already 
given, not expect delivery on all promises. The platform is the best 
and only general guide of what the party stands for, and despite the 
divergence between accomplishments and appraisal in the platform, 
or between promises and performance, it is a document with some 
substance and meaning. 



Part II 



ECONOMICS AND VOTES 



8. Political aspects of economic policy 



Unemployment and Election Returns * 

Theodore White mentions at least eight conditions under which 
Nixon might have won in the close election of 1960. Thus had Nixon 
campaigned in Michigan and Illinois instead of in New York and 
Ohio in the late stages of the campaign, he might have won. His 
loss has also been associated with the manner in which the Republi- 
cans messed up the opportunity to deal with Martin Luther King 
and in general with Nixon's attempt to win the white vote in the 
South and the Negro vote in the North. 

The importance of the Catholic vote is clear. Here the Republi- 
can analysis claims that, out of an 8-million gain of votes for Ken- 
nedy over Stevenson, the shiftover of Catholics to Kennedy ac- 
counted for 6 million. But the Michigan Survey Center concluded 
that about one half of this shift of votes was in fact a return of nor- 
mal Democrats who had climbed the Eisenhower bandwagon. 
Against the Catholic gains, moreover, one must put the loss to 
Kennedy of Protestant votes: that is, the votes of Protestants, ordi- 
narily Democrats, who would not have a Catholic in the White 
House. That the proportion of Protestant votes for the Republicans 
showed only a slight decline in 1960 over 1956 gives an indication of 
substantial losses of votes to Protestants, a partial offset to the gains 
of Catholics. In all, the Republican loss was 7-8 percentage points 
over 1956. White suggests that the voting in Oklahoma, Tennessee, 

* Messrs. Kaufman, Elversvela, Freidel, and Rees have written as follows: 
"In 23 states forming one contiguous bloc, above average unemployment at 
election time is very strongly associated with below average statewide votes for 
all Republican Congressional candidates collectively in each state." See The 
Review of Economics and Statistics, August, 1962. 

73 



74 }gl THE ECONOMICS OF THE POLITICAL PARTIES 

Utah, Florida, Kentucky, Oregon, Indiana, Ohio and Wisconsin re- 
vealed "that millions of Protestants could not tolerate the thought of 
a Catholic sitting in the White House." 1 

In this chapter I am concerned with another explanation of the 
Republican defeat, so far neglected, namely, mistaken economic 
policies that induced large amounts of unemployment. It is my 
thesis that, had the Eisenhower administration accepted modern 
theories of money and fiscal policy, they could have kept unem- 
ployment down to 4 per cent and thus have garnered enough addi- 
tional votes to achieve victory. Their failure to treat structural un- 
employment through retraining programs, area redevelopment, and 
so forth, also contributed to a high rate of unemployment. 

A 4 per cent unemployment record should have been attainable 
in the years 1957-1960. In the war years unemployment was less 
than 2 per cent and in 1946-1948, less than 4 per cent. The good 
record of these years points to the importance of adequate demand 
in stimulating the economy and depressing the unemployment rate. 

The importance of the unemployment problem lies in part in the 
fact that the election was very close in many states. As the Repub- 
lican Party Report shows, a shift of 11,874 votes would have given 
five states to the Republicans and have reversed the outcome of the 
Presidential election: Hawaii, Illinois, Missouri, New Mexico and 
Nevada. Moreover, the Republicans received 49-50 per cent of the 
votes in the following states: 2 



Hawaii 

Illinois 

Missouri 

New Jersey 

New Mexico 

Minnesota 

Delaware 

Michigan 

Texas 

It is of some interest that, among these states, seven experienced 
high levels of unemployment, these seven accounting for 111 elec- 
toral votes. Actually a reversal of two major states, Illinois with a 
Democratic plurality of 8,858 votes, and New Jersey with a plurality 



Per cent of 


No. of 


Republican 


Electoral 


Vote 


Votes 


50.0 


3 


49.9 


27 


49.7 


13 


49.6 


16 


49.6 


4 


49.3 


11 


49.2 


3 


49.0 


20 


49.0 


24 



Political aspects of economic policy 75 

of 22,091 votes would have given the election to the Republicans. 

Here are some facts about Illinois. The Chicago Metropolitan 
Area alone had 5.2 per cent unemployment in November, 1960, as 
against 4.1 per cent in November, 1959, and 4.8 per cent in 1960 as 
compared with 2.6 per cent in 1956. By early 1961, Illinois had 5.9 
per cent of its labor force receiving unemployment insurance, and 
late in 1960 Chicago alone had 91,000 unemployed. 

In New Jersey, the average unemployment in 6 metropolitan 
areas was 7 per cent in November, 1960, and the average unem- 
ployment in 1956 had been 5.8 per cent; in 1960, the average was 7 
per cent. Six metropolitan centers had 88,300 unemployed late in 
1960: the ratio of the labor force receiving unemployment insurance 
was 9.1 per cent. 3 

To gauge the effects of rising unemployment on the voting be- 
havior, one must estimate the numbers affected by the fact of un- 
employment, and the voting behavior of the unemployed against 
other members of the labor market. 

Table 7 compares the numbers unemployed with the Democratic 
plurality of certain crucial states. It is difficult to believe that when 
unemployment is 22, 9 and 8 times the voting plurality in Illinois, 
Missouri and New Jersey respectively, a frontal attack on the unem- 
ployment problem would not have elected Nixon. Had the three 
states of Illinois, Missouri and New Jersey, or even only Illinois and 
New Jersey, stayed with the Republicans Nixon would have been 
elected. A reversal in the other states listed might well have resulted 
from an adequate employment policy. Unemployment in 1960 aver- 
aged 5.6 per cent (roughly the average of 1957-1960) and rose by 
1 percentage point from the low in May to the election period. Even 
if we assume that the unemployed would have been reduced only 
from 5.6 to 4 per cent and that the party in power should be 
charged only for the unemployed in excess of 4 per cent, then this 
excess equalled 7, 2.7 and 2.4 times the plurality for Illinois, Mis- 
souri and New Jersey respectively. 

The argument may be made that the unemployed would in any 
case be in the Democratic fold. This is not necessarily so. In the 
Presidential vote, the percentage voting Democratic was as follows: 

Clerical 
Blue-collar 
Union membership 
Based on Michigan Survey Research Center Study on I960 Eleciion. 



1956 


1960 


38 


45 


47 


59 


57 


65 



76 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

A large part of the working population votes Republican. More- 
over, do not the Democratic gains in 1960 from 1956 reflect in part 
the deterioration of economic conditions since 1956? Another rele- 
vant point is that for every additional person unemployed, the ad- 
verse vote for the party in power is likely to be a multiple: not only 
the husband but also the wife is likely to change votes. Moreover, 
the larger number now fearing unemployment will also be influ- 
enced. And the unemployed shift: with 5 million average, 10 million 
will suffer unemployment in a year. 

The rise of unemployment in 1960 may be put at 1 per cent or 
around 750,000. The excess over 4 per cent would be around 1,200,- 
000. How many votes were lost as a result of unemployment? Cer- 
tainly the equivalent of 750,000 on account of the rise of unemploy- 
ment in 1960; and 1,200,000 on account of the excess over a reason- 
able minimum. Here I put the multiple effect (a larger gain for 
Democrats than given by the rise of unemployment) over against 
the allowance for affiliations with Democrats in any case ( a reduced 
gain) and also for the numbers in these states not voting — roughly 
30 per cent. 

Several other aspects of the unemployment problem should be 
noted: 

1. Five of the seven large states went to the Democrats: New 
York, Pennsylvania, New Jersey, Massachusetts, Michigan and Illi- 
nois. They accounted for 124 electoral votes, or almost half the votes 
needed. All these states had serious unemployment problems. 

But we should stress one point: the interrelationship of various 
causal factors. The victory in these states was the result of the shift 
of the Catholic vote; the returns of normal Democrats to the party of 
their habitual choice; the shift of the Negro votes, and also the 
unsatisfactory economic conditions. It is difficult, if not impossible, 
to disentangle these causes. 

2. Along the same lines, it is of interest that Republican losses 
in percentage points in 1960 vis-a-vis 1956 were in excess of the 
national average in Ohio, Pennsylvania, Illinois, New Hampshire, 
New York, New Jersey, Connecticut, Massachusetts and Rhode 
Island — again states with serious unemployment problems. 4 

3. Incidence of unemployment is aggravated by the concentra- 
tion of unemployment in certain metropolitan areas. In general, un- 
employment in surplus labor areas is about twice as high percentage- 
wise as in the country generally. 5 

From September, 1959 to September, 1960, and from November, 



Political aspects of economic policy 



77 



1959 to November, 1960, the percentage of unemployment rose in 
two thirds of the metropolitan areas with surplus labor. Of 12 major 
cities, 9 were areas of surplus labor, that is, much unemployment. 
In all these cities but Kansas City, the losses of the Republicans in 
the Presidential election exceeded the average. In all, 31 of the 39 
surplus areas had more unemployment in 1960 than in 1956. 

In their study the Republicans tend to minimize the problem of 
the depressed areas. They emphasize the effects of the shift of 
Catholic votes in these areas. But their sample is not a good one. 
The only major city included in this sample is Detroit — Chicago, 
Pittsburgh, Philadelphia (all with unemployment from 70,000 to 
90,000), Newark and Buffalo are omitted. 



TABLE 7 

Unemployment, Electoral Votes, and Plurality 
of Democrats by States 









No. of Times 


Unemployment 


* 




Unemploy- 


December 


Electoral 


Plurality, 


ment to 


1960 


Votes 


Democrats 


Plurality 


(000) 








1. Illinois 233 


27 


10,375 


22 A (20) f 


2. Missouri 90 


13 


9,980 


9.0 (7y 2 ) 


3. New Jersey 176 


16 


22,091 


8.0 (7) 


4. Texas 127 


24 


22,214 


5.8 (4y 2 ) 


5. Pennsylvania 464 


32 


116,326 


4.0 (3%) 


6. Michigan 229 


20 


66,841 


3.8 (3) 


7. Minnesota 84 


11 


22,018 


3.8 (3) 


8. West Virginia 65 


8 


45,791 


1.4 (It) 



* Unemployment figures obtained by multiplying numbers receiving un- 
employment compensation by average of ratio of unemployed to numbers re- 
ceiving unemployment compensation for the months November and December, 
1960. The ratio for 1960 is 2 to 1; the use of this ratio would have increased 
somewhat the estimates of unemployed. 

I used December figures for unemployment for these were the only state- 
wide figures available. Since national unemployment in October and November 
was substantially less, my figures overstate the case. But the ratio of unemploy- 
ment to voting plurality for the Democrats, even in October and November, 
was still much more than enough to account for the Democratic victory. The 
adjusted figures are shown in parentheses in the table. 

f Based on October-November unemployment. 

Source: Economic Report of the President, January 1961; Hearings, Area 
Redevelopment — 1961, p. 538; Republican National Committee, The 1960 
Elections, Appendix, Table 2. 



78 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

Some Thoughts for the Future 

During the first eight months of 1961, unemployment averaged 
around 7 per cent. Perhaps the Democrats were fortunate in that 
unemployment reached only 5.7 per cent by November. Had the 
rise been more rapid, the administration might have taken more 
drastic measures to correct the situation just before an election. It 
is generally known that Nixon prodded the Federal Reserve early 
in 1960 to increase monetary supplies; and the unexpectedly early 
reaction to recession of the Federal Reserve may well stem from 
Mr. Nixon's urgings. Yet on the basis of past performance the 
Eisenhower administration would have done little even with 7 per 
cent unemployment. On this score, the Republicans were fortunate 
that the recession had not bottomed out by November, 1960, at the 
low level reached by the second quarter of 1961. 

Unemployment is indeed a serious problem for the Kennedy 
administration. Each succeeding cyclical rise leaves a larger residue 
of unemployment. They will be held responsible for unemployment 
in 1962 and later years. With a stronger candidate for the industrial 
North (such as Rockefeller), the unemployment could very well 
contribute to the loss of such states as New York and Connecticut 
in addition to the crucial states already discussed. From a political 
viewpoint also it is imperative for the Democrats to reduce unem- 
ployment to 4 per cent or less. 

In view of the structure of voting, this is all the more important. 
In general, the trends in the structure of population favor the Re- 
publicans more than the Democrats. 

The Democrats have the following advantages : 

1. The tendency of the Catholic population to increase relatively. 
The Catholics tend to vote Democratic more than Republican, 
though note the shift under Eisenhower. 

Per cent of Catholic Vote, Democratic 
1948 1952 1956 1960 

66 52 45 81 

2. Negroes tend to vote Democratic and their rate of increase 
exceeds that of the white population. Moreover, the percentage of 
Negroes voting is likely to rise in excess of that of the nation. But the 
Negro population is only about one tenth of the total. The Gallup 
Poll gave the Republicans 21, 39 and 32 per cent of the Negro vote 



Political aspects of economic policy 79 

in the Presidential elections in 1952, 1956 and 1960. A small sample 
in the Republican study gives them 20, 36 and 30 per cent respec- 
tively. 

3. The rise of education is in one respect a likely favorable factor 
for the Democrats. A much larger percentage of Republicans vote 
than Democrats, and in part because of more education by Republi- 
cans. Though Democrats outnumber Republicans by 3 to 2 (62 per 
cent of all), the Democrats account for only 53.5 per cent of the 
normal two-party vote. Rising levels of education should help to 
correct this. But in another sense the Democrats are at a disadvan- 
tage. The plurality for Republicans in the college trained is much 
greater than for Democrats. The percentage difference is so large 
that the Republicans obtain a larger numerical advantage from the 
college trained than the Democrats from the high school trained. 
This advantage will continue to increase as in the next ten years 
college enrollment rises about three times as much relatively as 
high school enrollment. In numbers the rise of enrollment may not 
be greatly different in the high schools from that in the colleges. 
But the large plurality of Republicans in voting of the college trained 
gives them an additional advantage. It is, of course, possible that, 
as the college students come increasingly from families of relatively 
lower income and social status, this advantage for the Republicans 
may be cut. 

4. Other trends: 

Per cent of Democratic Votes in Presidential Voting 
1952 1956 1960 

Age 

Under 24 

55-64 

65 or over 
Type of Place of Residence 

Urban metropolis 

Suburban metropolis 

Cities over 50,000 

Towns, 2,500-50,000 

Rural 
Occupation of Head of Household 

Business and professional 

Clerical 

Blue-collar 

Farm operator 



(44)* 


(45)* 


(46) 


35 


33 


45 


37 


44 


41 


49 


53 


64 


34 


37 


50 


52 


34 


51 


37 


37 


43 


39 


42 


46 


31 


32 


46 


36 


38 


45 


55 


47 


59 


37 


47 


33 



49 


42 


55 


43 


44 


53 


27 


31 


36 



80 }0L THE ECONOMICS OF THE POLITICAL PARTIES 

Union Members 61 57 65 

Education 

Grade school 

High school 

College 

* Small sample — large margin of error. 

Source: Michigan Survey Research Center Study of 1960 Election and Re- 
publican National Committee, op. cit.; and Facts for Democrats, April, 1961. 

Democrats live predominately in the metropolitan areas. Their 
pluralities come largely from these areas. But the relative decline of 
population in the urban metropolis means serious losses for the 
Democrats. The shift to the suburban areas seemed to be an un- 
fortunate development for the Democratic party, and this is a shift 
that is likely to continue for many years. But in 1960 the Democrats 
obtained 50 per cent of the suburban vote, a vast improvement over 
1952 and 1956. The Republican percentage-point decline in 19 
suburban areas studied was roughly equal to the loss in the central 
city core. In relation to 1956, the Republicans lost 184,000 and the 
Democrats gained close to iy 2 million suburban votes. 6 

Probably the Republicans stand to gain from the rising suburban 
population. I say this despite the unusual gains in 1960. For a large 
part of the shift is explained by the increased Catholic vote for the 
Democratic nominee. Consider the relative gains of votes for the 
Democrats of 23, 11, 9 and 7 per cent respectively of suburban popu- 
lation in the Boston, Milwaukee, New York and Newark areas (all 
heavily Catholic), and compare with a 3 and 1 per cent gain for 
Republicans in the Louisville and Kansas City suburban areas. 7 

On the basis of occupational trends the Democrats are also 
destined to lose. Their strength lies in the blue-collar segment where 
they obtained 59 per cent of the vote in 1960. In business and pro- 
fessional and clerical, both of increasing importance, the Democrats 
are at a disadvantage. Surprisingly, they are also at a disadvantage 
because of the rising proportion of young and old in the years to 
come. The Republican advantage in farm labor is likely to become 
less important as the movement from the farms continues; but the 
numbers involved are not large. It is rather surprising, in view of 
the interest of the Democrats in the aged, that they vote more heavily 
for the Republicans, as are the gains for the Republicans of the rural 
vote in the light of agricultural economic trends since 1952. 



Political aspects of economic policy 81 

Summary 

On the whole, the Democrats gained votes as a result of the 
high and rising level of unemployment in 1960; but they will lose 
votes if they do not bring unemployment down to 4 per cent in the 
near future. The attack on unemployment is all the more needed to 
maintain a Democratic Administration in 1964 because the Demo- 
crats are likely to lose votes as a result of the changing age distribu- 
tion, employment structures, movement out of the central core of 
the metropolitan areas and the rising numbers of college graduates. 
Gains stemming from the relative rise of Catholic and Negro votes 
will not be enough to offset these losses. Furthermore, with a Catho- 
lic candidate, though the gains of votes for the Democrats are es- 
pecially important, losses of votes of Protestants who will not vote 
for a Catholic are also significant. On October 14, Mr. Elmo Roper 
said: "Protestants plan to vote for Nixon at about a 2-to-l ratio over 
Kennedy, but Catholics report that they intend to vote for Kennedy 
at a 4-to-l ratio over Nixon. However, in terms of numbers the 
disparity is not that wide because of the greater number of Protes- 
tants." The actual results according to two estimates were: Republi- 
can Catholic vote 22 and 19 per cent; Protestant, 62 and 63 per 
cent. 8 In view of these considerations the need of an adequate eco- 
nomic policy on the part of the Democrats is clear.* 

* A. Campbell and others in The American Voter ( 1960, pp. 356-60, 381- 
92) present a more sophisticated view of these problems. The authors concede 
that the pressure of unemployment is felt by all groups. In 1956, 31 per cent 
of the blue collar workers worried over the possibility of unemployment voted 
Republican; but 43 per cent of those not worried voted Republican; and in a 
recession (1958) a substantial number of Republicans deserted their party. 



Part III 

MONEY 



Introduction 

From politics we move on to money and prices. The Republi- 
can creed suggests that price stability is the major objective of eco- 
nomic policy, and emphasizes control of money as a means of 
stopping inflation. But control through money involves a choice of 
evils. If there must be interference, it should be through the most 
general control, that is, of money, not that of particular markets. 

For those who do not know the elements of money and banking, 
I offer a brief analysis. 

The theory is that the way to treat inflation is to cut the supply 
of money; this in turn will influence the total amount of spending. 
With reduced demand — that is, less money — the rise of prices should 
be stopped. 

The central monetary authority, the Federal Reserve, tries to 
control the situation through three major weapons. 

(1) Rediscount rate: a rise in rates charged the banks is sup- 
posed to discourage them from borrowing from the Federal Reserve, 
and hence contains the volume of reserves (cash with the central 
bank), and thus reduces (or moderates) the rise of money supplies. 
For every dollar of reserve, the member banks — that is, commercial 
banks — may create about five dollars of money through lending or 
purchasing investments. 

( 2 ) Open-market operations: the Federal Reserve sells and buys 
government securities. But in the 1950's it dealt almost exclusively 

83 



84 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

in short-term issues. A sale of securities tends to raise rates and 
make money more expensive. The sale in itself means higher rates; 
for more securities are thrown on the market, and prices, therefore, 
tend to fall — that is, the rates of interest rise. The securities sold by 
the Federal Reserve banks have to be paid for with cash balances 
(reserves) of the banks and, therefore, sales bring reduced reserves, 
and purchases, for which the Reserve pays in transfers to the balance 
at the Fed of commercial banks, result in additional reserves for the 
banking system. 

(3) A rise of reserve requirements: the Federal Reserve within 
limits can increase the cash required to be held against liabilities 
(deficits) of banks. The effect is, of course, to reduce the amount 
of money that can be created. 

The Federal Reserve deals directly with commercial banks. But 
other lending agencies (financial intermediaries), such as govern- 
ment credit agencies, insurance companies and savings banks, are 
also very important. Here control is indirect and these intermedi- 
aries can thwart the Reserve even though they create no money. 
By lending they can increase the amount of spending. The govern- 
ment has done virtually nothing to assure the cooperation of these 
institutions. 

Finally, the Eisenhower policy has also been to try to lengthen 
maturities of their securities and get them out of the banks. The 
theory is, issue long-term bonds at higher rates. They would be 
purchased by the public and not by the banks. Then banks would 
not purchase the short-term bonds and hence would not create 
money through loans to the Treasury. 



9. Inflation 



Eisenhower on Inflation 

In a television-radio program in 1952 a question had been asked 
the Presidential candidate: "You know what things cost today? High 
prices are just driving me crazy." 

Eisenhower answered: "Yes, my Mamie gets after me about the 
high cost of living. That is another reason why I say it is time for 
a change. It is time to get back to an honest dollar and an honest 
dollar's worth." 

From 1940 to 1952 consumer prices had risen by 89 per cent and 
from 1945 to 1951 by 45 per cent. Hence it is not surprising that in 
1952 Eisenhower made inflation one of the major issues of the cam- 
paign. 

In the 1956 campaign the President was not quite so outspoken 
about inflation. An inflation of 3 per cent or so in his first administra- 
tion had greatly concerned him. But the emphasis on the need of 
a stable dollar continued. For example, at a press conference on 
October 11, 1956, the President said: "At the same time we believe 
that if this country is going to prosper and be strong at home it has 
got to have a sound dollar. If you don't have a sound dollar this, 
my friends, this is what happens: 

"All of your pension schemes begin to fall to the ground, and in 
our country today, I don't know how many millions out of the 168, 
but many, many of those millions, most of them are coming to de- 
pend for their security in their old age on pensions and social secu- 
rity. If those dollars don't remain sound, those older people are 
going to be hurt. . . ." 

85 



86 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Stevenson on Inflation 

Governor Stevenson did not have very much to say about infla- 
tion in the 1952 campaign. At Baltimore on September 23, 1952, 
he did, however, devote his speech largely to the inflation problem. 

He could not accept the explanation of government waste and 
mismanagement. 

... as an explanation of the causes of inflation, it is poppycock. It's 
like a husband coming home, coming into the kitchen, and seeing one 
potato peeling that is too thick and exploding that now he knows why 
his wife can't make both ends meet. I'm for the government peeling its 
potatoes with a sharp knife and a miserly eye. Now I've done some sharp 
and miserly peeling myself in Illinois. . . . 

We have inflation today, not disaster, but serious because the gods of 
war, working through their agents in the Kremlin, have dumped a barrel 
of yeast into the bread of our economy. . . . 

Here we have the Republican and Democratic explanation of 
inflation. The Republican candidate was impressed by the fact that 
the purchaser of a bond in 1944 would see the purchasing power 
value of the bond cut by almost one half, and also by the fact that 
the Social Security annuitant would suffer similarly to the housewife 
going to the shop to buy her groceries or her hat or to have her 
hair done. 

The Democratic candidate was also perplexed by inflation and 
was not happy about it. Undoubtedly many of those who were being 
hurt by inflation would vote the Republican ticket. Even those who 
gained with inflation, in that they had jobs and higher real income, 
were nevertheless more impressed by the harmful effects of inflation 
than the availability of jobs, high output and rising standards of 
living. 

The Democrats could say little except to explain inflation by the 
large rise of government deficits and government expenditures 
brought on by war. 

The Failure of the Democrats to Answer Republican Charges 

The Democrats failed to answer the Eisenhower inflationary 
argument adequately. The fact is that inflation generally comes in 
wartimes. Over a period of 120 years the average rise of prices has 
been just a little more than 1 per cent. When one examines the 



Inflation 87 

periods during which prices rose one would find that they were 
almost invariably periods of war or the aftermath of war. The only 
large exception would be a few of the "cyclical" inflationary periods 
in the nineteenth century and also the rise of prices that followed the 
gold discoveries in California in the 1850's and in South Africa in 
the 1890's. 

Indeed it was true that the dollar had fallen in value by about 
one half since the 1930's. But the Democrats should have pointed 
out that the total amount of deposits and currency had risen from 
1933 to 1952 from $43 billion to $202 billion. In other words, even 
though one dollar was worth considerably less than it had been 
there were five times as many dollars available to be spent. Further- 
more, the gross national product, the best measure of our output, 
had risen from $56 billion to $347 billion, or a gain of about 5 times. 
In stable dollars the gross national product had risen from $139 to 
$393 billion. At least output had increased twice as much as the 
price level. To some extent the inflation was the price paid for this 
rise of output. 

The Democrats might have shown that in each succeeding major 
war their record in avoiding inflation had improved. For example, 
in the Civil War, under a Republican regime, the inflation was 14 
times as great as in World War II. In World War I it was 3 times as 
great as in World War II. In other words, the government was im- 
proving its anti-inflationary record greatly with the passage of time 
and the development of new techniques for contending with infla- 
tion. I obtain these figures, not by comparing the extent of the price 
rise of each of these three wars, but rather by measuring the price 
rise and adjusting for the proportion of national output directed to 
war. Thus not only was a much larger percentage of output used 
for war in World War II, but also the price increase was consider- 
ably less than in World War I. We should, however, allow for a 
substantial rise of prices after World War II, which certainly should 
be related to the effects of World War II. 

The History of Prices 

But let us turn to the history of prices during the crucial postwar 
years. With prices in 1947-1949 as 100, the price level in 1948 was 
102.8; in 1949, 101.8; in 1950, 102.8— a remarkable stability in three 
of the Truman years. But in 1951 the price level had risen to 111, 
and in 1952 and 1953 to 113.5 and 114.4 Here were the effects of the 



88 }0t THE ECONOMICS OF THE POLITICAL PARTIES 

Korean War. Once the effects of the war had been felt it was then 
possible to stabilize the price level. The Eisenhower administration 
experienced stable prices, and from 1952 to 1956 the price level had 
only risen from 113.5 to 116.2, or 2y 2 per cent. In fact, until 1955 
the increase had been only 1 per cent. This is a good record, though 
not quite so good as it appears, since some downward pressure is 
to be expected from the end of the Korean War in 1953. In his 
campaign of 1956 the President was not quite so outspoken about 
inflation, and he had to defend his own record. He could at least say 
that in the last six years of the Democratic regime prices had risen 
by 50 per cent, but in his own regime the increase had been only 
3 per cent. 

But the Eisenhower speeches of 1952 and even of 1956 were to 
haunt him by 1958. In fact, from 1955 to 1958 the country experi- 
enced a rise of consumer prices of 8 per cent, almost a record for 
American history in peacetimes. Since 1900 in only one period had 
there been an increase of similar proportions over three years during 
peacetimes. Of course, I exclude the large inflation following World 
War I. In the 1930's, when prices had been brought down by the 
Great Depression, there had been a rise over three years larger than 
the one from 1955 to 1958. The most general price rise, that measur- 
ing prices of the gross national product, actually rose 17 per cent 
from 1952 to 1960. 

Now the Democrats became the anti-inflationary party. They 
wanted to know how the present administration had allowed prices 
to rise by 8 per cent in three years in the midst of "peace" and even 
recession. 

Actually the record for 1948 to 1958 was not too bad. A rise of 
prices of 22 per cent was accompanied by an increase of output of 35 
per cent. The Korean War was also to blame for half the rise of 
prices. 

Summary 

In summary, the Democratic record did not seem a good one 
on the face of it, with such a large rise of prices for 1940-1948. But 
the Democrats were quite right in stressing the contribution of war. 
No economy could impose $86 billion additional defense expendi- 
tures in a year on a $100-billion economy within four years and 
escape a substantial amount of inflation. The fact is that with large 
amounts of unemployment in 1939 and a relatively strong fiscal 



Inflation 89 

policy as well as controls, the government was able to keep the price 
rise to less than 30 per cent before the end of the war. But inflation 
had been avoided during the war by restrictions on spending and 
price controls; once these controls were removed spending boomed. 
The inflation from 1945 to 1948 can largely be explained by the post- 
ponement of inflation that otherwise would have occurred during 
the war. Once the effects of the war had largely been felt, then the 
Truman administration showed it could also stabilize the price 
level. The Korean War upset prices again. In the years from 1952 
to 1956 the record of the Republican administration was a good 
one, for prices rose relatively little. But that for 1955 to 1958 was 
not so fortunate, and t he expl anation i n part may well be the failur e 
of the Republicans ^) keep government deficits and government 
s pending down, thoughas we shall see other factors we re p robably 
more important, 

What does this all add up to? The Republicans had an issue, 
inflation, that could effectively be exploited to attract votes. The 
average voter sees inflation, but not the rise of output and increase 
in the total purchasing power. He is not aware of the relation of 
war and its aftermath to the rising price level, nor, of course, the 
improvement of the record of the Democrats in contending with 
inflation in World War I and World War II. Rising prices cost the 
Democrats millions of votes, and they had not succeeded in present- 
ing adequately their refutation of the Eisenhower view. 



10. What causes inflation 



|£ The major spokesman for the Republican administration, Secre- 
tary of the Treasury Humphrey, argued that government deficits 
and borrowing were the major causes of inflation. First he pointed 
to the fact that in four years the Eisenhower administration had 
brought about an increase of prices of only 0.6 per cent per year, 
as compared to 7 per cent per year for the preceding thirteen years. 
He did not mention, of course, that war might have been a factor 
in the earlier period. At the Hearing of the Committee of Finance 
on the Investigation of the Financial Condition of the United States 
in June, 1957, the Secretary said: "Federal deficits necessitate in- 
creased federal borrowing. More federal borrowing to the extent 
it comes from the banks means it creates additional bank credit. 
This tends to create more spending dollars than there are goods to 
buy." 

In introducing his 1960 Budget in January, 1959, the President 
said: "By avoiding a deficit, it will help prevent further increases 
in the cost of living and the hidden and unfair tax that inflation 
imposes on personal savings and incomes/' 

In his concluding paragraph the President said that the impor- 
tant objectives can be achieved "through government actions which 
help foster private economic recovery and development and which 
restrain the forces that would drive prices higher, and thereby 
cheapen our money and erode our personal savings. The first step 
is to avoid a budget deficit by having the government live within 
its means, especially during prosperous, peacetime periods." * 

In his Economic Report he said: "The terms of agreement 
reached between labor and management in wage and related mat- 
ters will have a critical bearing on our success in attaining a higher 
90 



What causes inflation 91 

level of economic growth with stable prices. . . ." Then the Presi- 
dent discussed the importance of the government discharging its 
responsibility by helping to achieve economic growth with price 
stability through the prudent conduct of its own financial affairs. 2 

We must be clear that the contribution of the government, 
though it is large, may not be the decisive item in the determina- 
tion of prices. Even in 1958 government purchases of goods and 
services were little more than 20 per cent of the total gross national 
product. Indeed, as a means of offsetting the rises and declines in 
the private economy, the government does play a very important 
role. It can also be said that most serious inflations have been 
government-induced, largely because these inflations, at least in this 
country, have taken place in the midst of war. I would not deny for 
a moment that large government deficits or even large government 
expenditures under a balanced budget might contribute to inflation. 

In the last few years perhaps, the greatest attention has been paid ^ 
to t he cont ribution of ris ing wages to th e increase in prices. Up 
until a few years ago, a rise of prices was generally held to be ac- 
counted for by excess of demand over supply, the excess being 
brought about by increased spending, in turn related to rising sup- 
plies of money. In fact, the restraints of the Federal Reserve from 
1955 on were imposed on the theory that there was an excess I 
demand that could be treated by reducing the total supply of 
money and therefore the total demand for goods. On ne i t js ad m itted 
that jm increase in wage rates greater than thatjustified. by a rise 
of productivity may bring about a rise of ^ prices, then either the 
Federal Res erve must throw up its hands and sa vjt_ can not deal 
with this kind of a situation or, if it does, it mavjbrjng about^an 
increase ot unem ployment. In other words, as wage rates rise it is 
necessary toexpand the total Supply of money in order to validate 
the increase of wages. But if the Federal Reserve cuts the supply 
of money, then the increase in wages is not likely to be validated, 
and there is not enough money to provide full employment. It is 
of some interest that in 1958, 1959 and 1960 the President, as well as 
his Chairman of the Council of Economic Advisors, increasingly 
stressed the point that wage inflation is the explanation of the rise 
of prices. 

It is not at all clear that wage inflation alone has been the funda- 
mental factor in the recent rise of prices. In fact, a study by the 
Bureau of Labor Statistics, issued by Mr. Clague, shows that the 



s< 



92 ^g THE ECONOMICS OF THE POLITICAL PARTIES 

nonwage elements contributed as much relatively as the wage ele- 
ment to the rise of real costs per unit from 1947 to 1957. 

Another factor that could explain the inflation is, of course, the 
large rise in investment. An investment boom, in turn, of course, 
would induce an increase in demand for credit and put a strain on 
limited resources. As a matter of fact, although Secretary Humphrey 
tended to emphasize fiscal contributions to inflation of the middle 
fifties, Federal Reserve Board Chairman Martin blamed excess de- 
mand in general and at times heavy investment, and Under-Secretary 
Burgess interpreted the inflation as resulting from an investment 
boom. 

From what goes before, we_m ay conclude that governm ent,jwage 
policies and administered prices, as well as a large rise of in vest- 
ment, contri buted toward theTnrktion of 1956 to 1958. Undoubtedly 
the wage HrislTTelicTrng the price rise played a larger part in this 
inflation than has generally been true in inflationary periods in the 
past. This may be associated in part with strong trade unionism. 
Accompanying this wage rise was an increase in the contribution 
of administered prices. The administration tended to stress too much 
the unbalanced budget and trade unionism. (I have presented my 
position fully in reports to the Senate Finance -Committee and the 
_ Joint Committee on the Economic Report in 1959. ) 3 

rln studies for the Douglas Committee, the experts stressed rises 
of wages and profits as very important factors in inducing inflation 
from 1955 to 1959. The large rises occurred where market power 
was large. From 1955 to 1959 about one quarter of postwar inflation 
had occurred. Approximately three quarters of the rise in the whole- 
sale price index in these years, excluding farm and food products, 
had occurred in the metals and machinery components. Large rises 
in wages and prices were relevant in the metals industry, and excess 
demand in machinery. Much inflation also occurred in the service 
industries, in part the result of rising demand without adequate 
response of supply (for example, medicine), and in part the result 
of low productivity. That industries experiencing relatiV^cr^absolute 
declines in de mand did not respond through declines in pric es 
f urther contributed to inflation. 4 



11. The failure of monetary policy 



Eisenhower on Monetary Policy 

At a news conference on October 5, 1956, the President said: 
"The Federal Reserve is not under my control, and I think that it 
is proper that Congress did set it up as an independent agency." 

In a speech at Troy, New York, on October 22, 1952, the Presi- 
dent said: 

Administration's controls over prices are nothing but weak stopgaps. 
The really effective controls — those over money and credit — were ignored 
by the administration. The result of these controls would have paralyzed 
their scheme to use cheap money for their own ends. . . . 

. . . We shall create an atmosphere in which the Federal Reserve 
Board and the Treasury Department can act not as political enemies but 
as economic allies in the war against inflation. 

As I shall indicate in Chapter 13, we have not had this remark- 
able integration of federal agencies that the President hoped we 
would achieve in 1952. To this extent he could be held responsible 
for the inflation. His unwillingness to take any responsibility for the 
Federal Reserve, of course, meant that he should not be held di- 
rectly responsible for any mistakes made by the Federal Reserve. 
In thus washing his hands of any control over the Federal Reserve 
he encouraged the Federal Reserve to pursue independent policies. 
Throughout the period from 1952 on there were steady rises in 
credit granted by the various federal agencies. These occurred both 
in periods of monetary ease and periods of monetary restraint. 
Obviously there was little integration of the policies of the Federal 
Reserve and the many lending agencies of the Federal Government. 

93 



94 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

This, to some extent, can help explain the failure of the Federal 
Reserve to control the monetary system and stop the inflation, which 
they were so much interested in doing. In practice, even the Treasury 
has only limited control over credit agencies — issues, terms of lend- 
ing, time of issue, and so on. But lack of cooperation between Treas- 
ury and Federal Reserve increases the likelihood of contrary move- 
ments of credit agencies and banks. 

Responsibilities of the Federal Reserve for the 
Recession in 1957-1958 

The major task of the Federal Reserve, according to the original 
Act, was to accommodate commerce, and stabilize the economy, not 
to stabilize prices. Although its job is to prevent major instabilities 
in the economy, its responsibility is not to bring on a recession in 
the process of doing so. 1 But in the light of a vigorous monetary 
policy designed to reduce the total supply of money and therefore 
the total amount of spending in order to contain inflation, why did 
we nevertheless experience a rather high inflation of 8 per cent 
in three years, coincidental with a recession? 2 

Failure to Stop Monetary Expansion 

Monetary statistics do suggest that the Federal Reserve Board 
had considerable influence in restraining the expansion of the supply 
of money. There actually was a decline from December, 1954, to 
June, 1957. This is remarkable when it is considered that from 1954 
to the end of 1956 there was an increase of $48 billion, or 12 per 
cent, in the gross national product in stable prices. Ordinarily we 
expect an increase in the supply of money of at least 3 per cent to 
match this increase in output, and, in addition, in periods of rising 
income, people tend to hold a larger percentage of their income in 
cash and therefore we expect an even larger rise in the total supply 
of money. That the total supply was stabilized from December, 1954, 
to June, 1957 — the latter month may be roughly characterized as 
the beginning of the depression — and yet the boom continued un- 
abated suggests serious limitations of focusing policy on the supply 
of money. 

Though the Federal Reserve succeeded in stabilizing the total 
supply of money, it did not succeed in stabilizing the volume of 
loans to business. How were the banks able to expand their loans 
despite the stabilization in the total supply of money? They de- 



The failure of monetary policy 95 

pended largely on selling the U.S. Government securities in their 
portfolios, which — note — fell by $13.5 billion, or roughly 20 per cent, 
and they also depended to some extent on transfers of deposits 
from demand deposits (which required large reserves) to time 
deposits (which required small reserves). In this way the com- 
mercial banks were able to circumvent the Federal Reserve. We 
then have one explanation of the failure to stop the rise of prices: 
namely, that the commercial banks were able to expand their 
activity despite the success of the Federal Reserve Board in stabil- 
izing the total supply of money and in forcing the member banks 
into debt. The economy also used excess liquidity of the past. 

The Financial Intermediaries 

Another reason for the failure of monetary policy is the freedom 
of financial intermediaries, such as insurance companies and savings 
and loan associations. These play an important role in the monetary 
structure of our economy which is largely outside of the control 
by the Federal Reserve Board. Actually, there was much misunder- 
standing among Washington authorities on this issue. Unlike the 
commercial banks, financial intermediaries cannot affect the supply 
of money ( currency and demand deposits ) as it is currently defined, 
but they can affect what economists call the "velocity of money": 
that is, the rate at which money is used. An increase in that rate 
acts like a rise of supply. The ability of financial intermediaries to 
do this depends upon their large holdings of securities, especially 
government bonds. If the earnings on newly issued securities appear 
sufficiently attractive, they can sell the government bonds and pur- 
chase new securities. If the government bonds are sold to persons 
or institutions holding idle cash balances, this process has in effect 
activated these balances by getting them into the income stream. 
And this is inflationary. 3 

Unfortunately, it is not necessarily true that the net purchase 
of assets by these financial intermediaries, inclusive of government 
credit agencies, all reflect current savings, and hence are noninfla- 
tionary. They may, in fact, absorb previous accumulations of cash, 
which are then put to work because the markets are favorable. The 
relationship between the total supply of money and the activities of 
these intermediaries is a very loose one; through their operations 
inactive money becomes active. As interest rates rise with a tighten- 
ing of credit, holders of savings are likely to switch their funds from 



96 ^| THE ECONOMICS OF THE POLITICAL PARTIES 

demand accounts to time deposits, which require considerably less 
reserves, and as rates rise still further, from time deposits to holdings 
at savings associations, for which there are no reserve requirements. 
In this way the velocity of money is increased and Federal Reserve 
policy is circumvented. In spite of this, the Federal Reserve Board 
has persistently resisted suggestions that it extend its control over 
financial intermediaries, in part because of the (undoubtedly for- 
midable) administrative difficulties involved in exercising control. 4 

Failure to Use Weapons 

Another reason for the difficulties of the Federal Reserve was 
that the other agencies did not cooperate as much as might have 
been possible. In fact, the use of fiscal policy, the most modern tech- 
nique for controlling the economy, was backward indeed. In a period 
of boom it would be expected that the excessive receipts of the 
Federal Government would increase and that this increase would 
therefore reduce the excess of spending. Of course, the government 
would then, by obtaining an excess of taxes over expenditures, re- 
duce the spending in the private economy. In 1956 there actually 
was a substantial increase in the excess of receipts both on a budg- 
etary and on a cash basis. But this was not caused by any policies 
on the part of the Federal Government. The increase in receipts 
was the automatic result of rising taxes with improved economic 
conditions. No important single measure was taken, for example, to 
increase taxes through a rise in tax rates or to cut down public 
spending. I shall say more later about the failure to use fiscal policy. 

An increased control of consumer credit would to some extent 
control the activities of the financial intermediaries who deal with 
this type of credit especially, but the Federal Reserve Board would 
not accept this kind of interference, nor would Secretary Humphrey, 
who said this was undesirable because it would mean control from 
Washington. 

Policy, Ideology and Uneven Incidence of Dear Money 

In truth, the whole control of the financial system goes right 
back to the ideology of the Eisenhower administration. The ad- 
ministration wanted general, not specific, controls, because specific 
controls increase the authority of the government. The administra- 
tion was willing to accept a general control of the total supply of 
money and, therefore, it put much of the responsibility for control- 



The failure of monetary policy 97 

ling the economic situation on the Federal Reserve. The administra- 
tion disliked special controls over housing credit, the consumer, or 
control of particular groups of financial intermediaries directly. 
Under the prevailing philosophy of the Federal Reserve Board, the 
so-called general controls — determination of the total supply of 
money, reserve requirements and the discount rate — because of their 
"neutral" effect on the economy are to be preferred over the selec- 
tive controls. 

In fact, however, general controls have anything but a neutral 
effect. Most of the burden of adjustment to a tight money policy 
must be made by three sectors — housing, state and local govern- 
ment, and small businesses — and for reasons related to other govern- 
ment policies. Because of the maximum interest rates imposed on 
VA and FHA housing mortgages, for example, as interest rates rise 
in accordance with a policy for general credit tightening, few banks 
and other lending institutions find investments in this type of mort- 
gage attractive. Between 1955 and 1957 FHA- and VA-guaranteed 
mortgages fell from 36 to 25 per cent of nonfarm residential con- 
struction under $20,000. "Neutral" policy hit this type of mortgage 
exceptionally hard. 

The small borrower, who is dependent on the money market, also 
finds himself in serious trouble under general credit control. This 
affects not only the small private borrower but the public borrower 
— and hence the taxpayer. In the period of dear money, for example, 
since 1954, the school districts and other state and local government 
borrowers were especially hard hit. They found that they had to 
pay much higher rates to borrow for schools. In four years, a New 
York district had to offer rates higher by 60 per cent. 5 

Whose Recession? 

So much for the anti-inflationary policy. But what of the 1957- 
1958 recession? The Federal Reserve Board was not inclined to take 
credit for the recession. They tended to argue that the recession 
was simply the aftermath of the inflation. Yet if the Federal Reserve 
deserves some credit for containing the inflation, certainly the reduc- 
tion of the supply of money must have contributed toward the 
recession. 6 

After a year of recession ( June, 1957, to June, 1958 ) , the amount 
of money, demand deposits adjusted, increased only by $600 mil- 
lion, or about 0.5 per cent. Indeed, loans and investments rose by 



98 }0> THE ECONOMICS OF THE POLITICAL PARTIES 

about $14 billion, or 8-9 per cent, but it will be noted that the 
increase in loans was only $2 billion, or about 2 per cent, and, as is 
usual in a period of recession, the banks retreated to government 
securities. The Federal Reserve credit outstanding, the means 
through which the Federal Reserve contributes to the higher re- 
serves of the commercial banks upon which they expand their 
monetary supplies and advance credit, rose only by about $700 mil- 
lion, or 3 per cent, despite a year of recession. This is indeed a small 
increase. 

Here again the ideology of the administration was crucial. A 
strong fear of inflation and the erosion of savings made the Federal 
Reserve very sensitive to any inflationary dangers. Even before the 
recession had worked itself out, the Federal Reserve Board intro- 
duced restrictive monetary policies in 1958. An aggressive policy 
of monetary expansion might well have been called for, but it was 
not forthcoming. We shall deal with the recession more fully later on. 

In short, the Federal Reserve Board was greatly concerned over 
the dangers of inflation and in the years 1955-1957 surely helped 
contain it. This was the contribution of the Federal Reserve. But in 
trying to control inflation, the Federal Reserve also helped bring 
on the recession. The Federal Reserve has not taken credit for its 
contribution toward the reduction of output. In choosing to fight 
inflation and accept the risks of a recession, the Federal Reserve 
Board was reflecting well the ideology of the administration. That 
ideology called for stability of the currency above all and a refusal 
to use instruments at the disposal of the government for guiding the 
economy, such as measures to be taken against financial intermedi- 
aries or controls of special markets. Rather the Federal Reserve was 
content, as was the administration, to rely largely on general mone- 
tary measures irrespective of the varying incidence of these measures 
upon different segments of the economy. Even these — for example, 
reduced rates — were not used until several months after the first 
signs of recession were unmistakably clear. That the large corpora- 
tions felt the smallest effects also might to some extent be held to 
reflect the interests of the administration. 

In the 1950's, it became increasingly clear that monetary policy 
alone cannot achieve the economic objectives of the country. But 
the Eisenhower administration in seven years of impasse had not 
offered a single suggestion on how to deal with the financial inter- 
mediaries and, by entrusting great authority and faith to the Federal 



The failure of monetary policy 99 

Reserve, had underutilized other weapons of control: in particular, 
control of segments of the market (for example, consumer credit) 
and fiscal policy. 

The record in 1959 was also indefensible. In the face of a large 
government deficit, dumping of securities by the banks and large 
demands for credit, a tightening of credit conditions by the Federal 
Reserve brought a sharp rise of rates in 1959-1960 — in fact, as 
Arthur Burns said, one that stood out over a period of 100 years — 
and stopped the recovery after a record brief period of improvement. 



12. Money and interest rates: 

some history 



}0, The Democrats have traditionally been the party of monetary 
expansion and national monetary control. They have favored the 
enlargement of the circulating medium and the reduction of interest 
rates to ease burdens on debtors ( including the government ) as well 
as to expand credit and output. They have also favored government 
control of the monetary supply and the employment of that control 
to influence economic conditions. Thus it was the Democrats who 
gave the country a central banking system. However, the fact 
that, since the Civil War, the Democrats have been in control in 
wartime somewhat exaggerates the party's dedication to monetary 
expansion. War always swells money and debt, and the increase 
under the Democrats would have been less had they not been in 
office in war periods. 

In contrast, the traditional Republican position from Grant to 
Eisenhower has been in favor of hard money (for many years, the 
automatic gold standard ) as against a flexible monetary supply, and 
in favor of private rather than public control of monetary policy. 
Thus Republicans ordinarily want the interest rate to be determined 
by private supply and demand rather than by a public judgment 
concerning national needs. As for monetary creation, in the Republi- 
can ideology, it is an evil. It is too easy a manner of achieving output. 
The input of paper and ink is virtually costless and therefore must 
be ineffectual. The Republican ideology goes back to the Puritans 
with their emphasis on saving and the classical economists with 
their insistence either that money makes no difference to the level 
of output and employment or that an expansion of money merely 
brings a corresponding rise of prices. 

The cult of the "free" money market is an old one for the Re- 
100 



Money and interest rates: some history 101 

publicans. Even when the government influences the rate of interest, 
as in the issue of the famous 3^4 per cent government bonds in 
1953, a rate substantially above the market, or when the Federal 
Reserve raised rates through rediscount and open-market policy, the 
relevant officials still denied any influence on the market. In defend- 
ing his high rate policies in 1956, Chairman Martin of the Federal 
Reserve Board said: 

I think it [the money market] is a free market. I think one of the great 
blessings of our economy today is that neither the Federal Reserve nor 
the Treasury is strong enough to override the forces at the grass roots 
that are there in the economy. . . . Now, you can vitiate the forces of 
supply and demand, but you pay a price for it, and when the Treasury 
does its financing, neither the Federal Reserve nor the Treasury can 
afford to ignore the forces of the market unless they want to have un- 
bridled inflation. 1 

In the midst of the Great Depression in 1932, when commodity 
prices had fallen by one third, income by one half and unemploy- 
ment had reached 12 million, A. C. Miller, member of the Federal 
Reserve Board, close associate of President Hoover, was speaking in 
the Republican tradition: 

Nature is doing her work ... let us not underestimate our recupera- 
tive powers. . . . We take resort particularly in cheap money devices 
in the hope and even in the belief that they will somehow or other wipe 
out past mistakes. . . . You do not want to overload your firebox with 
coal. . . . Even wise practitioners in administering cod-liver oil through 
the stomach will lay off at the end of the month. 2 

What a historical survey shows is that the major expansion of 
money occurred under the Democrats and notably in wartimes; 
that the great deflations, aside from the usual postwar declines, 
occurred under the Republicans — in the last quarter of the nine- 
teenth century and in the early 1930's. It is also clear that, in the 
absence of government creation of money through deficits and sales 
of public securities to the banks, the supply of money would have 
been inadequate since 1914 to sustain our economy. 

Stability Versus Growth 3 

It is the theme of this chapter that the Democrats seek supplies 
of money adequate to assure high levels of employment, and that the 



102 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

Republicans are prepared to use monetary stringency to protect the 
stability of the dollar, and hence the real value of savings, even at 
the cost of unemployment. In espousing the interests of savers, the 
Republicans, like the Democrats, are also interested in distribution 
of income. But the Democrats are more concerned over the position 
of the low-income group. Writing in the Review of Economics and 
Statistics in November, 1956, Professor Fellner of Yale, now an 
advisor to a Republican Congressional group, in supporting the 
administration policy, suggested that the administration should not 
risk too much inflation simply to help the relatively few who are 
unemployed. 

Fortunately, over our history other principles have prevailed. 
According to the classic study of Dr. R. W. Goldsmith (A Study of 
Savings in the United States), the proportion of liquid assets (cash, 
deposits, government securities) to total national assets rose from 
9 per cent in 1900 to 11 per cent in 1929 and 27 per cent in 1949. 
Over a period of 150 years, our monetary supplies increased by 
3,500 times, national income by 400 times, and population by 28 
times. These are of course only the roughest of figures. Yet despite 
this phenomenal expansion of money, prices over the 150 years 
moved (net) surprisingly little. The Democrats were determined to 
provide needed supplies of money and protect the debtor. Inflation 
was not their objective, but they were prepared to risk a modest 
dose of inflation in order to achieve justice for the debtor, and an 
expanding economy. 

The Republicans, on the other hand — in the last third of the 
nineteenth century, in the early 1930's and in the years 1953-1958 — 
were prepared to starve the currency for the sake of stability even if 
it hurt economic growth. From 1866 to 1893, with the Republicans 
in control during all but four years, the price level declined by 43 
per cent. Repayment of debt contributed greatly to a decline of 
prices and the failure of monetary supplies to rise more than half 
as much as product. 4 In the post- 1929 period, even as prices de- 
clined by 40 per cent, the Republicans feared deficits and inflation 
and introduced policies that came close to destroying our system. 

In stressing the 50 per cent drop in the value of the dollar, the 
President and the Secretary of the Treasury adhered to Republican 
dogma. Thus Secretary Humphrey: "And the long trend of inflation 
that dropped the value of the dollar from 100 cents in 1939 to 52 



Money and interest rates: some history 103 

cents in 13 years has been halted, with no significant loss in the buy- 
ing power of the dollar now over three full years." 5 

Republican leaders failed to note ( 1 ) that the inflation occurred 
in wartimes; (2) that the average rise in prices per year in nonwar 
and nondemobilization years was much less under the Democrats 
than under the Republicans from 1952 to 1958 ( 1932 to 1940 = 
average 0.375 per cent; from 1948 to 1950, no change; from 1952 to 
1958, average of 1.5 per cent), and (3) that the number of dollars 
available had increased several times so that all dollars purchased 
about twice as much in the early fifties as before the war. 

What is relevant is not only the purchasing power of the dollar, 
but also the number of dollars. The "hard" dollar has, among other 
things, been hard to get. 

Monetary and debt policy, notably in 1953, revealed the princi- 
ples of the Republican party. 

They were fearful of an inflation, at intervals not apparent to 
most. 

They wanted a free market in money. 

The Republicans sought higher interest rates on government 
securities, which they contended would prevail in a free market. 

They anticipated that with higher rates government securities 
would move into nonbanking channels, the government would be 
able to lengthen maturities of debts, and monetary supplies would 
fall. ( The last follows because short-term securities tend to gravitate 
toward the banks, and with their purchases, the banks create money 
by giving deposits. ) 

But they failed to stabilize the cost of living. They failed to get 
securities substantially out of the banks or substantially lengthen 
maturities. In fact, the Democrats, despite greater monetary expan- 
sion, were much more successful in the years 1945-1952 in moving 
securities out of the banks and reducing the importance of short-term 
securities than was the Eisenhower administration. 6 

Democratic Monetary Policy 

Throughout history the Democrats have been the party of easy 
money. It is true that Jackson in his antagonism toward the Second 
Bank of the United States was an advocate of hard money, but 
many of his supporters fought the Bank in order to remove restraints 
on paper money and credit. 7 Orthodox economists for a century at 



104 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

least have supported the policy of monetary restriction and restraint. 
But it is not so clear to all of us now that the Greenbackers and 
Bryan were wrong in their objectives. Despite the vast expansion of 
monetary supplies over our history, the dollar has remained a rela- 
tively stable monetary unit. No major country can match this record 
over 150 years. A statistical survey over a period of 150 years sug- 
gests that the expansion of money, the rise of federal outlays and of 
federal debt are largely related to war. 

Recent Trends in Money and Other Variables 

An examination of monetary policies and supplies in the postwar 
period points to the rather restrained issues of money in recent years 
and especially since 1952. Our growth in the past had been to the 
accompaniment of monetary expansion far beyond the increase of 
national product. The growth of money was associated, especially 
in the last fifty years, to a considerable degree, with the expansion 
of national debt. Undoubtedly the slower rate of monetary expansion 
in the postwar period is tied to the stability (net) in national debt 
outstanding in the last ten years. 

It is not fair for President Eisenhower and Secretary Humphrey 
to contrast the great inflation that took place from 1940 to 1952 
with the modest one of the years 1953 to 1956. In one period the 
country was waging two major wars; in the other we were pre- 
sumably at peace. In the nine years of Democratic government since 
1932, exclusive of war and demobilization years, the cost of living 
rose but 0.8 per cent per year. Under President Eisenhower from 
1952 to 1959, the annual rise was close to 1.33 per cent. One should 
not, however, be too critical of Eisenhower's great fear of inflation. 
A party that comes in after a major war and much inflation is 
forced to stress anti-inflationary policies. 

The fact is that, over our history, the country grew up to its 
monetary supplies. Indeed, there were periods (like the last quarter 
of the nineteenth century) when the monetary system was rigid 
and perverse in its behavior. Additional money was required not 
only to monetize the economy and finance the growth of the nation, 
but also to provide the additional cash which the people want as 
their standards of living rise. Thus we can explain a rise of money 
greatly exceeding the increase of income. We should not forget, 
furthermore, that part of the added supplies of money financed 
inflationary episodes which are characteristic of economies with 



Money and interest rates: some history 105 

shortages of capital. In a developing economy, inflation serves a 
useful purpose, if not carried too far, in providing needed capital. 

Money is necessary for the employment of our people and the 
production of goods and services. Where does this money come 
from? From newly mined gold, a rather inadequate and inflexible 
source. From the purchase of commercial paper and other loans 
by banks, and payment for these with newly created money. But 
these sources are inadequate. Hence the need of government debt 
to provide a backing for money created by banks to satisfy the needs 
of our system. A starved currency system means falling prices, losses 
for industry, and reduced output and much unemployment. 

From all of this we conclude that monetary expansion con- 
tributed greatly to the growth of the country; that the rise of na- 
tional debt helped sustain this growth; that whatever inflation fol- 
lowed was primarily the product of wars, not Democratic mistakes, 
and, as might be expected with the advance of economics, that the 
Democrats would manage World War I and World War II with 
much less inflation than Republicans managed the Civil War. Fur- 
thermore, when the Eisenhower administration complained of 
Democratic inflation, it is only fair to point that Republican mem- 
bers of Congress opposed higher taxes in the course of the war and 
price controls after the war and advocated tax cuts in the postwar 
years. 

In short, the Democrats are the party of adequate monetary sup- 
plies. They use money to maximize output and to provide adequate 
credit for the Treasury, an important link in our economy. Republi- 
cans are fearful of expanding supplies of money, and are prepared 
to impair the nation's output and the price of government securities 
in order to maintain absolute stability of the dollar. 



13. Some issues raised by the 
independence of the Federal Reserve 



f^t One of the most puzzling aspects of Republican policy is the 
almost fanatical insistence on an independent Federal Reserve 
System. In the light of the great responsibilities of the government to 
achieve maximum output and reasonable stability, and the need 
to mobilize the whole battery of economic weapons into a well 
integrated attack, this economist does not support the theory of 
independence. Thirty years ago orthodox economists and conserva- 
tive politicians considered the independence of the Federal Reserve 
Board — its reluctance to restrain speculations by increasing interest 
rates — a major cause of the 1929 crash. 1 

Once we understand the value judgments of the Republican 
administration, we realize why President Eisenhower set so much 
store by independence. It means to the Republicans a free capital 
market and interest rates determined by free forces, not by central 
direction from Washington. Absence of political pressures would 
then bring a free market, restricted supplies of money, higher inter- 
est rates, price stability, freedom from Treasury control ( and hence 
less bickering), greater reliance for raising output on management, 
toil, increased capital in response to higher interest rates — and less 
recourse to the supposedly artificial prosperity induced by monetary 
creation. The Eisenhower administration looked back and found 
that the largest expansion of money occurred under the Democrats, 
that the rate of interest on government securities fell by one half 
in a war and postwar period of fourteen years and prices rose ac- 
cordingly, while the outstanding federal issues rose from $24 to 
$260 billion, a fact obviously explained by the creation of money 
and artificial demand; and finally that under this control of the 
Federal Reserve by the Treasury, prices steadily rose. 
106 



Some issues raised by independence of Federal Reserve 107 

It might be expected that the Federal Reserve, with its strong 
views on inflation, would take all measures to protect the nation 
against inflation. However, in part because of its close association 
with bankers, the Federal Reserve has consistently favored a reduc- 
tion in upper limits in reserve requirements. Reduced reserve re- 
quirements provide the banks with increased lending capacity and 
hence larger profits, and, what is more, reducing reserve require- 
ments, rather than expansion through open-market operations ( that 
is, purchases of securities by the Federal Reserve), diverts profits 
from the Treasury to the commercial banks, and increases pressures 
for inflation. 2 

The Central Problem 

Clearly, there is something wrong with our economic policies. In 
the years 1956-1958 we achieved neither price stabilization nor 
optimum growth. The failures result, I believe, in no small part 
from inability or unwillingness to integrate monetary and other 
economic policies. According to the Employment Act of 1946, the 
President is responsible for maximum employment, maximum out- 
put, and purchasing power, but he was most reluctant to make any 
suggestions about monetary policy. It was like trying to fight a war 
with an air force that declines to accept orders from the commander- 
in-chief. 

This failure to integrate may have been acceptable many years 
ago, but it is no longer acceptable. The theory of the independence 
of the Federal Reserve Board goes back to a day when the govern- 
ment's responsibility for the economy was rather primitive. With 
our commitments under the Act of 1946 and the dangers of the 
modern world, we cannot allow the Federal Reserve to move in one 
direction and other agencies and departments to move in another. 

The Independence Myth 

In the last few years the Federal Reserve has been under general 
attack. I believe that it deserves credit for showing courage in 
trying to cope with inflationary policies. In fact, the Federal Reserve 
showed more courage in the last few years than in the famous 
inflationary period of the late 1920's. But with equal candor I must 
say that these policies have often not been successful, and they have 
often been unwise. Smarting from these attacks, the Federal Reserve 
and its defender, President Eisenhower, have time and again in 
the 1950's flaunted the independence of the Federal Reserve. 3 



108 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

In the war period and until 1951, the Federal Reserve was largely 
under the control of the Treasury and the President. When there 
were disagreements between the Federal Reserve Board and the 
Treasury, President Truman would call the members in and arrange 
for agreement. Surely during this period there was little talk about 
independence, though there were protests from the Federal Reserve. 

It is clear that by 1956 the Treasury and the Council of Economic 
Advisors were frequently in disagreement with the Federal Reserve. 
Which was to decide the objectives of national economic policies? 
Clearly, the 1946 Act provided for maximum employment and out- 
put, and surely the Federal Reserve policy was not consistent with 
these objectives. 

I said to the Byrd Committee on April 24, 1958: "This restrictive 
monetary policy had unfortunate effects on other counts. It 
amounted to an induced desertion of the government security 
market. Whereas in the years before the 1951 Accord the charge 
was made that monetary policy was subservient to the Treasury, 
in 1956-1957 the monetary authorities could be criticized for intro- 
ducing a policy which largely abandoned the interests of the Treas- 
ury." 

In hearings before the Joint Economic Committee, 4 Elliott V. 
Bell, editor and publisher of Business Week, presented a strong case 
for a policy of better integration between the Federal Reserve and 
other agencies of the government. He pointed out that the control 
of money was in the hands of Congress and not the Federal Reserve 
and that Congress had merely delegated the administration of this 
power to the Federal Reserve. He said: "The United States is, I 
believe, the only country in which the central bank is not owned 
outright or controlled directly by the political government," and, 
"We must always be alert, however, to the danger that considera- 
tions dictated by the private interests may come to influence the 
decisions of the Reserve authorities." 

Independence or Integration? 

The Federal Reserve has put up a strong fight for its independ- 
ent position. But one can be sure that the independence of the 
Federal Reserve will stimulate other agencies and departments of 
the Federal Government to equal independence. For example, in 
1953 the Treasury introduced a vigorous dear-money policy. Mr. 



Some issues raised by independence of Federal Reserve 109 

Burgess had hardly come into office when he introduced his 3% 
per cent long-term bond rate, which demoralized the bond market 
and required a hasty retreat, gates on long-term issues rose from 
2.75 per cent in December, 1952, to 3.09 per cent by May, 1953, 
with ensuing panic in the long-term markets and depreciation of 
outstanding issues. Here the Federal Reserve acquiesced, but one 
does not know with what reluctance. Here Treasury independence 
was forcing the hand of the Federal Reserve. 

Or consider the Treasury policies in 1957 and 1958. In the mid- 
dle of 1957 the Federal Reserve was working hard at its anti-infla- 
tionary policy. This meant a policy to raise interest rates, cut down 
the amount of borrowing, and increase the amount of savings. The 
objective was higher interest rates. What did the Treasury do? Did 
the Treasury issue long-term securities — considered the proper 
policy in such a period? The objective of issuing long-term securities 
is to raise the rate of interest: in other words, increase the supply of 
securities and the rate of interest goes up. Instead of issuing long- 
term securities, consistent with its long-run objective of reducing 
the floating debt, the Treasury nullified to some extent the effects 
of Federal Reserve policy by issuing short-term securities. Here was 
a direct conflict between the independent Treasury and the inde- 
pendent Federal Reserve. 

Again in 1958 the Federal Reserve had reversed its policy and 
had introduced a modest cheap-money policy. What did the Treas- 
ury do? Did it issue short-term securities so that the interest rate 
should not rise? Indeed, it did not. It concentrated heavily on long- 
term and intermediate securities, with the result that the Federal 
Reserve's efforts to bring down the rate of interest were nullified to 
some extent by the Treasury policy of competing with the private 
market and issuing large quantities of relatively long-term securities. 
Thus from January to June, 1958, a period of monetary ease and 
recession, short-term issues declined by $6.4 billion and long-term 
issues rose by $8.8 billion. 

The theory of an independent Federal Reserve is based on by- 
gone days when monetary policy was the exclusive weapon, when 
government assumed little responsibility for the economy, when the 
1946 Act had not been born. In 1962 independence means failure to 
mobilize all available weapons in a manner necessary to achieve the 
objectives of the 1946 Act. 



110 ^0 THE ECONOMICS OF THE POLITICAL PARTIES 

Independence and the Inadequacies of Policies 

Left alone, the Federal Reserve has been able to enforce its own 
"independent" analysis of our economic needs. In particular, it has 
distracted national economic policy by its obsession with inflation 
as the ever-present danger even in the midst of a recession. But 
there are other objectives of economic life besides price stability. 
We must keep inflation down as much as possible, of course, but 
we also must have growth and we must have fair distribution. 

It is not a question of white or black. A 1 per cent inflation and 
a 10 per cent rise of output is good policy, and a 10 per cent inflation 
and a 1 per cent rise of output is bad policy. 

If we are skeptical about the objectives of the administration 
and the Federal Reserve, we also object to the weapons that have 
been used to achieve their objectives. Altogether too much confi- 
dence has been placed in monetary policy per se. A policy that aims 
to increase the rate of interest may well have a serious effect on 
employment and output because businessmen compare the rate of 
interest they have to pay and the profits they expect to make. If the 
correct policy is an anti-inflationary policy, it would be much better 
to depend upon fiscal policy to a much greater degree. In other 
words, keep the rate of interest down and then deal with the prob- 
lem of inflation and adequacy of consumption through spending 
and tax policy and especially the latter. 

Even in the monetary field the Federal Reserve has failed to use 
its weapons effectively. Why the self-denying ordinance against 
dealing in bonds, the "bills only" policy? If the objective is to in- 
fluence the level of activity, the most effective approach is to operate 
on the long-term rate of interest — that is, through the purchase and 
sale of government bonds by the Federal Reserve. Yet the Federal 
Reserve, despite the opposition of ex-President Sproul of the New 
York Reserve Bank, has insisted upon a "bills only" policy. 5 This in 
part explains the failure of the long-term interest rate to come down 
as rapidly as it otherwise might have during the recession period. 
The transmission of lower rates on the short-term market to the 
long-term market is delayed and inadequate. 

One is also impressed by the painfully slow response of the 
Federal Reserve to the recession of 1957-1958. Discount rates rose 
even after it was clear to most that the economy had been moving 
sideways or even downward for quite a long period. The reversal 
of policy came after several months of decline. What is more, for 



Some issues raised by independence of Federal Reserve 111 

almost a year after the initial decline the reserves of member banks 
were practically unchanged. In the recession of 1960-1961, the Fed- 
eral Reserve showed much greater flexibility in introducing an 
anti-recession monetary policy. 

The case for independence is weakened in so far as the results of 
this independent policy were disappointing. 

We experienced both an inflation and a recession in 1956-1958. 

The Federal Reserve did not use all weapons effectively. 

The monetary authorities pursued anti-inflationary policies too 
long, and cheap-money policies too late and with inadequate vigor. 

Excessive dependence on monetary policy excluded potent use 
of fiscal policy. 

Independence and Conflict of Agencies 

One boast of President Eisenhower was, it will be recalled, that 
his administration would not have internal disagreements of the 
preceding administration. But no preceding Secretary of the Treas- 
ury attacked the executive budget, as Secretary Humphrey did in 
1957 when he announced that the government's tax take would pro- 
duce "a depression that will curl your hair.'' As Marquis Childs in 
his excellent book on Eisenhower observed: ". . . What an extra- 
ordinary performance Humphrey had put on! A member of the 
President's Cabinet, the Secretary of the Treasury, the man who 
determined the government's fiscal policy, openly attacking a budget 
that had been presumably agreed to within the entire Adminis- 
tration. . . ." 6 

Equally important, though less spectacular, was the disagree- 
ment between Mr. Martin, on the one hand, and Secretary Hum- 
phrey of the Treasury and Dr. Burns of the President's Economic 
Council, on the other, in early 1956. 

Business Week, on April 23 and May 5, 1956, had some interest- 
ing things to say about the disagreements: "So strongly did Hum- 
phrey disagree that he drafted a public statement of his views. He 
killed it at the last minute to avoid an open controversy." This dis- 
agreement became generally known in Washington, and Congress- 
man Patman held hearings on the issues. 7 

In the midst of this dispute the President reaffirmed the com- 
plete independence of our central banking organization. 

. . . He acknowledged that the policy of credit stringency now being 
pursued by the Federal Reserve was one that raised grave doubts on the 



112 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

part of his own advisors. Nevertheless, with the usual patience and 
breadth of view, the President defended the right of the Federal Reserve 
to pursue an independent course. No other President has ever spoken 
thus. 8 

In his reply, speaking of the rise of rates in 1956, Chairman 
Burns of the Economic Council said: ". . . In view of somewhat 
conflicting tendencies, particularly the divergent movements that 
have occurred of late in retail trade and capital expenditures, I 
doubt the timeliness of this action. . . ." 9 

The National Economic Council 

The Employment Act of 1946 provided for an economic council, 
which is largely a planning agency that advises the President on the 
general economic situation and suggests policies to him. But some 
urge a national economic council composed of the operating 
agencies in the areas of money, credit and fiscal policy. A suggestion 
along these lines has been made by Elliott Bell, as well as by Senator 
Anderson. 

In 1952, Truman's Secretary of the Treasury made a similar 
proposal: 

I think one of the most important steps toward providing a quick 
means of settling such disputes would be a public and a congressional 
recognition of the fact that it is natural, proper and desirable for the 
President to seek to settle them by having all the interested parties sit 
around at tables to discuss their differences with him. . . . 10 

The major objective of this organization would be to integrate 
credit and fiscal policies within the limits set by the Congress in 
such a manner as to give the country the maximum output con- 
sistent with a reasonable degree of stability of prices. This council 
should be strong enough to prevent the Treasury going one way 
and the Federal Reserve going another, or the Treasury and Federal 
Reserve agreeing on restrictive policies, and all other credit agencies 
expanding greatly. 

To some extent the credit agencies are not absolutely free to 
operate in such a manner as to satisfy our major objectives of eco- 
nomic policy. A credit agency, for example, may be required by the 
Congress to buy agricultural surpluses or to issue housing mortgages 
or guarantees of certain amounts. But within these limits credit 



Some issues raised by independence of Federal Reserve 113 

agencies should conform to the general objectives of the Federal 
Government. 

Conclusion 

By insisting rigidly on an independent Federal Reserve Board, the 
Eisenhower administration voluntarily tied its own hands. The Presi- 
dent failed to use all weapons that might contribute toward the at- 
tainment of his economic objectives. He failed to recognize the fact 
that monetary policy cannot be divorced from political considera- 
tions and that an independent policy of the Federal Reserve not 
only blunts other weapons but in the long run is likely to weaken 
monetary policy. At the same time, by taking this position, he en- 
couraged disagreements and bickering among departments, which 
above all he wanted to avoid. This stress on an independent Federal 
Reserve stems from the apotheosis of the free market, which is the 
heart of Republican ideology. 

I cannot refrain from stressing the absurdity of the situation. 
The Federal Reserve, more than a mere technical institution, de- 
termines the objective of monetary policy — for example, growth or 
stability. Yet the Federal Reserve, in our democratic society, is 
independent and responsible neither to the Congress nor the Presi- 
dent. The aura of independence has been carried so far that when 
the Congress proposes that the Federal Reserve should reconsider 
its "bills only" policy, the Federal Reserve authorities announce 
that they are not willing to go along. Is it expedient to allow an 
agency which can influence prices, output, employment and gen- 
erally the allocation of resources, to operate without adequate pub- 
lic accountability? 

In 1961-62 there seems to be improved integration under the 
leadership of Secretary Dillon. 



14. Kennedy on money 

and the rate of interest 



The Troublesome Problems Confronting the President 

For years the Democrats had made restrictive monetary policies 
and rising rates of interest one of the major political issues. For 
example, in commenting on the Nixon Committee of 1959 recom- 
mendation for a rise in interest rates, the Democratic Digest wrote: 

Finally and predictably, the Committee asks an increase in interest 
rates. This is the one price that can always be increased to all manner of 
reputable applause. In Republic economic policy, adjusting interest rates 
has something of the standing of a miracle drug. . . . 1 

All signs pointed to repudiation of the Republican monetary 
policies. Restrictive monetary policy has never been a favorite 
therapy of Democratic governments. Indeed the Eisenhower admin- 
istration and the Federal Reserve anticipated the likelihood of at- 
tack in this area, and they were on the defensive. They sent out 
their top advisors in 1959-1960 to present the Republican viewpoint. 
The general line was that the Federal Reserve or the Federal Re- 
serve and the Treasury had only limited powers to influence rates; 
that most increases of credit stemmed from noncommercial bank 
lenders over which the Federal Reserve had no or very little con- 
trol; that looked at from a long-run viewpoint, the rate of interest 
was not high in 1959; that restrictions in the supply of money, ir- 
respective of the causes of the inflationary threat, were the only 
effective attack on inflation; that any attempts to influence the long- 
term rate of interest through purchases of government securities 
were bound to be ineffective or damaging, first because the rate 
was determined by market forces and second because a rise of price 
114 



Kennedy on money and the rate of interest 115 

of long-term securities would soon bring a rise in that of short-term 
issues ( decline in rates ) , with attendant exports of capital and loss 
of gold to countries with higher rates; and finally purchases of 
long-term assets in large quantities are not practical because of the 
obstacles faced in disposing of them.- These defenders of the anti- 
inflationary policies also harped on the large costs of inflation, and 
related rising interest rates to the increasing awareness of inflation- 
ary dangers: lenders demanded a higher rate to compensate for the 
repayment in dollars of reduced purchasing power. 

In the late stages of the 1960 campaign, Nixon returned to the 
charges of Democratic inflation, which had been one of the major 
issues of the 1952 campaign. In one speech he commented on losses 
of one-third of security and pension income as a result of inflation. 
It happened "in the seven years of good old Harry." In iy 2 years 
of Truman, the price of overalls went up by 53 per cent; a man's 
shirt, 60 per cent; an innerspring mattress, 28 per cent. Finally, 
Nixon found that the value of the dollar had declined 50 per cent 
in the seven Truman years. (The actual decline was 32 per cent. 
Apparently Nixon confused a 50 per cent rise of prices with a 50 
per cent decline in the value of the dollar. ) According to Nixon the 
decline was the result of creating too much money and deficit 
financing. 3 

It might be assumed that President Kennedy would move fast to 
reverse the trend toward higher rates. In the campaign he said 
little about money and interest rates. I could find only two state- 
ments in his speeches and, one an ineffective reply to a question. 
Commenting on the tendency of the Republicans to adopt dear- 
money policies too easily, Kennedy in a talk to businessmen also 
urged greater use of reductions of money rates to stimulate the 
economy. The Federal Reserve, in his view, held on to high rates too 
long and helped bring on recessions. ". . . each successive valley in 
the economy has ended with higher and higher rates — with the 
result that paradoxically high rates accompanied heavy unemploy- 
ment, low production and a slack economy. 

". . . Without rejecting monetary stringency as a potential 
method for curbing extravagant booms, we would make use of other 
tools." 

In his television appearances, Kennedy also commented several 
times on monetary policy and the rate of interest. At a "Meet the 
Press" session on October 16, the Senator pointed out that the high 



116 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

rates of interest had not stopped the increase in the cost of living, 
but had induced recession. He hoped that fuller use of manpower 
and facilities and greater competition "would provide sufficient 
price competition to maintain a reasonable stability in the dollar. 
You may get some inflation because historically we have gradually 
had inflation. The problem is to keep in balance with our increase in 
productive capacity and increase in our gross national product." 4 

Kennedy's task force on the Economy (P. A. Samuelson, Chair- 
man ) , of which the writer was a member, reported to the President- 
elect on January 6, 1961. This committee was not certain that high 
employment would not bring further inflationary pressures. The 
price creep, whether brought on by excessive wages or market- 
power of industry, was, in the view of the committee, a matter to 
be seriously considered. ". . . the goal of high employment and 
effective real growth cannot be abandoned because of the problem- 
atical fear that reattaining of prosperity in America may bring with 
it some difficulties; if recovery means a reopening of the cost-push 
problem, then we have no choice but to move closer to the day 
when the problem has to be successfully grappled with. . . ." 

Finally, the committee warned that if prices and wages rise long 
before we reach high employment, then new tools will have to be 
forged in addition to monetary control ( the innovation of the 1920's ) 
and fiscal policy ( the contribution of the 1930's ). 5 

In appointing James Tobin, who had just written a severe criti- 
cism of Federal Reserve policy, a fact that Tobin made known to the 
President-elect before his appointment, the President reflected his 
own doubts about monetary policy. Tobin not only had raised some 
questions about the independence of the Federal Reserve, but he 
also had pointed out that the Federal Reserve did not seem to 
realize that fiscal policy could be used as a substitute for monetary 
policy. Nor was he clear that the Republican value system, which 
weighted price stability much more heavily than the Democrats 
and growth and employment much less heavily, was the desired 
one. 6 

The President also dwelt on monetary policy in his early state- 
ments. In discussing the gold problem, he said in his State of the 
Union message of January 30: "This administration will not distort 
the value of the dollar in any fashion. And this is a commitment." 

On February 2 the President sent a message to the Congress on 
"Economy Recovery and Growth" in which he expressed the need of 



Kennedy on money and the rate of interest 117 

bringing the long-term rate of interest down. This was in his view 
a necessary condition for the expansion of investment, private and 
public. In this same message he announced the plan for a President's 
Advisory Committee on Labor-Management Policy which he hoped 
would promote ". . . sound wage policies, sound price policies and 
stability, a higher standard of living, increased productivity, and 
America's competitive position in world markets." 

The President also warned that he would not accept reasonable 
price stability by "tolerating a slack economy, chronic unemploy- 
ment and a creeping rate of growth. 

"Neither will we seek to buy short-run economic gains by pay- 
ing the price of excessive increases in the cost of living." 

The Monetary Situation 

The 1950's were not a period of monetary expansion. In fact, the 
President-elect could look back to an era of surprising lack of mone- 
tary growth. Whereas demand deposits plus currency in circulation 
was 37.4 cents per dollar of GNP in 1952, the ratio was only 28.6 
per cent in 1960. 

An indication of the monetary supplies in relation to GNP and 
interest rate trends is given below. Monetary supplies declined 
vis-a-vis GNP, and rates of interest, in response to restrictive mone- 
tary policy, rose greatly. Monetary stringency would have been felt 
much more had not the rate of deposit turnover risen substantially. 
The last is explained in large part by the increased activities of the 
financial intermediaries (such as insurance companies) over which 
the Federal Reserve had little control and, for some inexplicable 
reason, never sought control. 7 

table 8 

Money and Related Variables, 1960 

(1950=100) 

Money supply = 122 

Annual rate of deposit turnover = 149 

GNP = 177 

Long-term bond yield (corporate Aaa) = 168 

On the whole, in each succeeding recession the descent of rates 
has been from a higher level and the percentage reduction smaller. 






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Kennedy on money and the rate of interest 119 

The relatively high rate on Treasury bills in 1960 is to be explained 
in part by the importance of the gold flows: to contain them, the 
short-term rate was not allowed to fall too much. 

Money rates seemed to reach a low point in May, 1961. The yield 
on three-month Treasury bills (new issues) rose from 2.288 in May 
to 2.359 in June but were relatively stable through October. For 
other issues also rates were substantially higher in June through 
November than in May. 

Difficulties Encountered by Kennedy in Pursuing 
an Easy-Money Policy 

President Kennedy undoubtedly would have liked to depress 
rates more than they actually declined. Among the deterrents was 
the international situation. Short-term capital movements out of the 
country in 1960 accounted for about two thirds of the loss of reserves 
of the United States. 8 These movements to a considerable extent 
reflected the difference between short-term rates here and abroad. 
Rates tended to be substantially higher in Western Europe. Hence 
funds moved to Europe, and foreign traders tended to borrow 
money here for financing their trade — a form of capital movement. 
Some of Kennedy's advisors feared that a reduction of long-term 
rates would too soon depress short-term rates as investors would 
move into the short-term markets with the decline of long-term rates, 
and borrowers would seek more long-term money. 

The Problem of Mr. Martin 

Perhaps an equally important obstacle was William McChesney 
Martin, the Chairman of the Board of Governors of the Federal 
Reserve Board. Under pressure from the White House, the Board 
finally capitulated on the "Bills Only" policy, that is they began buy- 
ing long-term securities. The President and his advisors and espe- 
cially the Council of Economic Advisors tried to get Mr. Martin to 
move more aggressively toward lower rates. 

But the President could not press Mr. Martin too hard. Dis- 
patches from Europe by Edwin Dale of the Times quoting Euro- 
pean central bankers in the summer of 1960 made clear to Senator 
Kennedy that Martin was a symbol of orthodoxy in monetary 
management. Should the Democrats dispose of Mr. Martin, these 
central bankers warned in a true blackmailing manner, they would 
embarrass the government by exchanging dollars for gold in New 



120 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

York. Interestingly, these central bankers were silent on the point 
that their banks were anything but independent of government. 

Obviously the President could not directly attack the independ- 
ence of the Federal Reserve. But it was generally understood that 
Kennedy was going to be a strong President. Such a President 
would not, as Eisenhower did, allow the Federal Reserve independ- 
ence in the sense that once objectives were determined, the Federal 
Reserve would be allowed to pursue policies that were inconsistent 
with these objectives. 

But the Chairman of the Federal Reserve, when confronted by 
the President's statement that "The full financial influence of Gov- 
ernment must continue to be exerted in the direction of general 
credit ease and further monetary growth," replied to members of 
the Joint Economic Committee that "the Federal Reserve will care- 
fully consider anything that the President of the United States says 
at any time, and we welcome his views." The Vice-Chairman of the 
Open Market Committee, Alfred Hayes, admitted that the Open 
Market Committee had not even discussed the President's state- 
ment. 9 This is obviously a situation that the President is not likely 
to accept for any long period of time. He will undoubtedly expect 
the Federal Reserve to develop monetary policies consistent with 
the general objectives of the government. 

His reluctance to annoy the financial groups was perhaps also 
evident in the appointment of his first Board member, George 
Mitchell. The obvious appointment would have been an acade- 
mician who would have espoused Democratic policies and fought 
the Martin policies, or an able Congressman like Henry Reuss who 
could have restrained Martin. But the President settled on George 
Mitchell, a Federal Reserve Vice-President who in the views of some 
apparently had some doubts concerning Martin's policies and was 
critical of the excessive concern of the Federal Reserve with advice 
from bankers. It remains to be seen whether Mitchell will reflect 
the views of the administration and, if he does, his capacity at in- 
fighting with the able and courageous Martin and his advisors. 

The President's Economic Council was clear on its position in 
these matters. On March 6, 1961, the Council in its first statement 
to the Joint Economic Committee complained of the high interest 
rates. "Whether interest rates are regarded as a cause or as a symp- 
tom of borrowing and lending activity, substantial monetary and 



Kennedy on money and the rate of interest 121 

credit expansion can scarcely occur without significant easing of 
rates." 

Lower rates were necessary to stimulate investment, to recover 
"the ground lost in the recession . . . and [for] the important tasks 
of restoring full employment and promoting growth." Greater de- 
pendence on fiscal policy would reduce the reliance on tight money 
policies. 10 

Moreover, the Council, impressed by the large improvement in 
the U.S. balance of payments in the early months of 1961, would 
exploit that improvement by depressing short-term rates further 
than had seemed wise in 1960. In reply to Congressman Thomas 
Curtis, the Council urged, against the Federal Reserve, that by 
operations of the Federal Reserve and the Treasury, the govern- 
ment ". . . can within broad limits offset or reinforce changes in 
private supplies and demands in government securities markets and 
thus affect the interest rates which these markets determine. . . ." 11 

Achievements 

How far did the Federal Reserve go in easing money and thus 
contribute toward lower interest rates? Not very far. 12 

a. Provision of additional reserves. From May, 1960 (the onset 
of the recession), to May, 1961, the Federal Reserve provided 
roughly $3 billion of additional cash for the banks — two thirds 
through making available currency and cash in vaults as reserves 
and one third through purchases of government securities. The 
resultant $3.1 billion were used up primarily as follows (major 
items ) : 

1. Financing gold exports = roughly $2 billion 

2. Financing increased money in 

circulation = n $300 million 

3. Reduction of member bank debts to 

Federal Reserve = n $400 million 

4. Rise of reserves of banks with 

Federal Reserve = n $600 million 

(reserves rose by 3 per cent) 

This was not a large achievement. Open market operations on 
the scale of 1932 would have required purchases not of $900 million, 



122 }0 THE ECONOMICS OF THE POLITICAL PARTIES 

but about $18 billion. No one would ask for such increases. But why 
not an additional billion of purchases of government securities and 
an additional billion of cash reserves? This might have contributed 
to more money and spending. 

In May, 1961, when the Federal Reserve was being subjected to 
pressures to facilitate new financing, it actually allowed member 
bank reserves to decline by $193 million. 13 

b. What about the shift to long-term securities? 

U.S. Debt Outstanding $ Million 

Change 
May, 1960 to 
End May, 1 961 End May, 1 960 May, 1 961 

Bills 2,651 2,019 + 632 

Certificates 6,517 8,507 -1,990 

Notes 14,548 13,010 +1,538 

Bonds 3,170 2,484 + 686 

All U.S. Securities 26,887 26,035 + 852 

Here there is some improvement — a liquidation of $1,358 mil- 
lion of short-term, a rise of $1,538 million of intermediate issues 
(notes) and of $686 million of long-term. But the magnitude of 
these operations was not exciting; even when we allow for substan- 
tial purchases of long-term issues in the Treasury for its various 
accounts, about 40 per cent of the rise of intermediate and long-term 
were the result of additional purchases. 

Why, it may be asked, was the Federal Reserve so reluctant? 
The answer is undoubtedly an exaggerated fear of inflation and a 
determination to interfere a minimum with the market. One could 
not be sure that a new administration, dedicated to more ample 
creation of money, had come in. But there was improvement. 

In one respect the Federal Reserve deserved credit. They intro- 
duced monetary expansion much earlier in the 1960 decline than in 
the previous recessions. How much this was the result of pressure 
from Vice-President Nixon who was fearful of the effects of a re- 
cession on the November results still is not known. Nixon was ap- 
parently more effective than Secretary Humphrey and Dr. Arthur 
Burns had been in 1956 in trying to dissuade the Federal Reserve 
from dear money in an election year. At any rate, this early action 



Kennedy on money and the rate of interest 123 

in 1960 makes up to some extent for a rise of rates in 1959-1960 of 
proportions that, according to Arthur Burns, were unparalleled in 
100 years. 

In view of the large excess capacity and the slow rise of wages 
(in one recent period of 12 months real weekly wages had actually 
declined a few per cent), and the weak bargaining position of labor 
in 1961, the Federal Reserve could not justify its excessive fears of 
inflation early in 1961. Moreover, it is clear that in the first year 
of improved economic conditions ( say through the middle of 1962 ) , 
the substantial gains of productivity and the lag of rises in wages are 
almost certain to exclude inflation in this year. The second year is 
another matter. 

Conclusion 

In some respects the administration was successful in its de- 
termination to end the dear money and high interest rate policies. 
The Federal Reserve abandoned its "bills-only" policy and made 
additional reserves available. Money rates declined to some extent. 
But on all these points, the advance was not adequate, given the 
need for additional investments. 

The major obstacle to the President's money program was the 
dollar problem, relevant not only because of the relation of exports 
of capital and gold movements to differences in short-term rates 
here and abroad, but also because of a fear of impairment of com- 
petitive position associated with rising supplies of money and higher 
prices. Related to all of these was the presence of Mr. Martin who 
was the symbol of dear money, anti-inflationism and an independent 
Federal Reserve. 

Indeed the Treasury and the Federal Reserve have only limited 
powers to determine rates of interest. Moreover, recovery tends to 
divert funds into equities and marketing of new bond issues. Hence 
with these diversions and additional issues of bonds, it becomes all 
the more difficult to depress money rates. (New issues, of course, 
are one of the objectives of cheap money. ) Yet I would not argue by 
a long shot that the Federal Reserve did all that might be expected 
to bring rates down. 

Lower rates are a necessary condition for adequate investment. 
By the early part of 1963, we shall need a GNP at 1961 prices of 
about $600 billion to bring unemployment down to 4 per cent; 



124 ^0 THE ECONOMICS OF THE POLITICAL PARTIES 

and this in turn will require investment of about $100 billion or a 
rise of $40 billion (67 per eent) from the early 1961 level. This is 
a tremendous rise on the basis of past experience. In fact, private 
investment, which averaged 15.4 per cent of GNP in 1953-1956, 
had declined to 14.2 per cent in 1957-1960. Even in the great boom 
of 1955 and 1956, the rise was only from $49 billion in 1954 to $64 
billion and to $67 1 / {> billion in 1955 and 1956 respectively, or a rise 
of little more than one third. 

What is the solution, then, aside from larger activities of the 
Federal Reserve inclusive of its propaganda that it will bring rates 
down? Once the market assumes the Federal Reserve is not serious, 
it acts on the assumption of high rates. Such large increases of invest- 
ment require a battery of weapons: tax credit for investments, 
reduced interest rates, greater expenditures for research, rising 
public investments, et cetera, et cetera. 

The Kennedy administration tried very hard to stimulate invest- 
ments in the housing area, not only by depressing rates, but also 
by extending the period of mortgages, and reducing down payments 
— all measures to reduce monthly payments currently; and also by 
sponsoring much larger FHA insured mortgages for home improve- 
ment. But the Eisenhower administration had moved so far in the 
area of reducing down payments and extending periods of mortgages 
that little could be done in this area — and especially since housing 
vacancies are on the increase. 14 

The President was not satisfied with progress made. In the re- 
leased version of his Special Message to Congress on National 
Needs, of May 25, the President said: 

. . . full recovery and economic growth require sustained increases 
in investment, and these in turn depend on favorable monetary and credit 
conditions as well as the enactment of the investment tax credit incentive 
plan . . . the full financial influence of the Government must continue to 
be exerted in the direction of general credit ease and further monetary 
growth while the economy is recovering. Some further downward ad- 
justments in interest rates, particularly those which have been slow to 
adjust in the recent recession, are clearly desirable. . . . 

Undoubtedly, the independence of the Federal Reserve con- 
tinued to be a problem for a Democratic President. Late in Septem- 
ber, 1960, the Senator had written to the Washington Daily News 



Kennedy on money and the rate of interest 125 

that the Board of Governors of the Federal Reserve System is given 
a degree of independence by the Federal Reserve Act, but it cannot 
be considered a fourth branch of the government. "It must bear in 
mind the economic objectives of the Administration, and I am con- 
fident that it would respond to leadership by the Administration." 15 
Has the Federal Reserve yielded sufficiently? I do not think so. Yet 
in one respect the record is not bad. In a period of nine months, a 
rise of GNP of about $40 billion did not bring significant increases 
of rates. For this the Treasury and the Federal Reserve deserve 
credit. ( I write in January, 1962. ) 



Part IV 



BUDGET AND FISCAL POLICY 



15. The budget 



^f In the midst of the most fearful economic depression of modern 
times, President Hoover said: "... I propose to balance the budget 
by drastic decreases and postponements of ordinary expenditures 
and increase taxes." Mr. Mellon, his Secretary of the Treasury, had 
said: ". . . liquidate labor, liquidate stocks, liquidate the farmers 
. . . when the people get an inflation brainstorm, the only way to 
get it out of their blood is to let it collapse ... a panic would purge 
the rottenness out of the system." Even candidate Roosevelt in 1932 
had this to say: ". . . Let us have the courage to stop borrowing 
to meet continuing deficits. Stop the deficits. . . . But you and I 
know that a continuation of that habit means the poorhouse." 1 

Budgetary Views 

In the campaign of 1952, General Eisenhower adopted a posi- 
tion that was quite consistent with those of Hoover and Mellon in 
some respects, though on the whole more advanced. In a statement 
of November 1, 1952, the Republican candidate said: "I pledge an 
elimination of waste, inefficiency and duplication in government. 
Expenditures, and consequently taxes, are too high. We must take 
steps that would make a reduction possible. . . ." 

In a speech at Springfield, Illinois, on October 2, 1952, General 
Eisenhower discussed the necessity for expanding production and 
providing adequate incentives : 

A major step toward this end is to reduce government spending and 
thereby permit lower taxation. Federal spending can be cut from the pres- 
ent rate of $81 billion a year. By the way, has anyone here any idea how 
much $81 billion is? I'd like to see it measured in $1000 bills, but I have 

129 



130 }0> THE ECONOMICS OF THE POLITICAL PARTIES 

never seen a $1000 bill either. My goal, assuming that the cold war gets 
no worse, is to cut federal spending [to] something like $60 billion within 
four years. Such a cut will eliminate the deficit in the budget and would 
make way for a substantial tax reduction. 

hater Views 

In general, President Eisenhower adhered to this antispending 
position throughout his administration. For a moment in 1954 he 
seemed to have had some qualms about the wisdom of cutting spend- 
ing; even then, however, he seemed to favor a reduction in the 
taxes, not a rise of outlays. In his 1954 Economic Report (pages 
3-4) he said: "Government must use its vast powers to help main- 
tain employment and purchasing power as well as to maintain rea- 
sonably stable prices. . . . We shall not hesitate to use any or all of 
these weapons as the situation may require." We know from R. J. 
Donovan's book on Eisenhower that the President was anxious to act, 
as was his able assistant Arthur Burns, but Secretary Humphrey 
restrained them. 

In his 1956 State of the Union Message of January 5, the Presi- 
dent could say that he had made long strides in bringing federal 
finance under control: ". . . Government waste and extravagance 
were searched out. Nonessential activities were dropped. Govern- 
ment expenses were carefully scrutinized. Total spending was cut 
by $14 billion below the amount planned by the previous Adminis- 
tration for the fiscal year 1954." He was clearly moving steadily 
toward Humphrey's orthodoxy. 

In the great dispute of 1957, President Eisenhower seemed rather 
confused. At one point he said: "Congress has the duty to cut this 
$71.8 billion budget if it can find places to wield the economy axe." 
But at a press conference at the same time, he also said: "As long 
as the American people demand, and, in my opinion, deserve the 
kind of services that this budget provides, we have got to spend 
this kind of money." 2 

By 1959 the President had seemed much more inflexible on issues 
of fiscal policy. He was determined to cut expenditures and to bal- 
ance the budget, and his 1960 budget projected a $3 billion cut in 
expenditures. The 1961 budget, despite a rise in the gross national 
product of $30 billion in calendar 1959 and rosy prospects for 1960, 
included a rise of but $1.4 billion. In January, 1961, despite the 
recession, he proposed a balanced budget. 



The budget 131 

On January 5, 1959, Time reported: 

President Eisenhower's grim determination to get a balanced budget 
has resulted in the most serious friction in his official family in the six 
years of his Administration. In line with the President: Treasury Secretary 
Robert Anderson and Budget Director Maurice Stans, who believe that 
a balanced budget is simply an act of fiscal good faith; Commerce Secre- 
tary Lewis Strauss and Postmaster General Arthur Summerfield, who ac- 
cept [this] as a symbol of good management and proper Republican con- 
servatism. Aligned against the President: Labor Secretary James Mitchell, 
Attorney General William Rogers and to a lesser degree Interior Secretary 
Fred Seaton, and Health and Welfare Secretary Arthur Flemming. In 
tune with the rebels is Vice President Nixon, who has been unhappy with 
the President's attack on big spenders ever since Nixon himself pushed it 
in the November campaign. 

But irrespective of any disagreements, the Cabinet Committee's 
interim report of June, 1959, on U.S. Price Stability and Economic 
Growth was clearly against government spending: 

Not only is it imperative that the budget be balanced in the fiscal year 
starting next month, but it is important that the national debt be reduced. 
Any effort to increase expenditures beyond the levels recommended in 
your budget should be vigorously resisted. Holding the line on expendi- 
tures together with improved revenues from prosperous business condi- 
tions would make possible some reduction of the debt. Not only must the 
line be held on the total of next year's appropriations, but it is important 
that the greatest restraint and selectivity be exercised in authorizing pro- 
grams for later years. . . . 3 

It is clear that the Republicans were determined to keep expendi- 
tures down, to balance the budget, and even to repay part of the 
debt, even if such a project were costly to full employment and 
economic growth. Nevertheless, the party has not, at any point, 
succeeded in realizing its own objectives of 1952 — even despite the 
end of the Korean War, which should have eased the financial posi- 
tion. In 1954-1961 there were more years of unbalanced budgets 
than of balanced budgets. 

From the end of 1952 to the end of 1960, the national debt rose 
by $23 billion. Nor did government expenditures decline as the 
President had anticipated. There was a reduction from $74 billion 
in 1953 to $64.5 billion in 1955, but by fiscal 1962 (the last Eisen- 
hower Budget ) the total was again up to $82 billion. 



132 ^| THE ECONOMICS OF THE POLITICAL PARTIES 

Yet in many ways the Republican record was better than they 
made it out to be. That is, it is better in the sense that they came 
nearer achieving a curtailment of expenditures than their own 
statements would lead one to believe. Why should this be so? The 
answer is that the Republicans did not relate the budget to the size 
of the economy. For example, from F.Y. 1954 to 1961, the rise of 
government expenditures is estimated at only $11.8 billion, or 17 
per cent. In the same period the gross national product rose by an 
estimated $138 billion, or 39 per cent. In these years the proportion 
of federal expenditures (estimated) to the gross national product 
dropped from 19 to 16 per cent. In eight years, government (federal) 
purchases dropped from 15 to 10 per cent of GNP. Then why did 
not the Eisenhower administration point to this evidence of a great 
improvement in its spending position — that is, an improvement 
according to Republican objectives? The answer must be either 
that they did not understand the elementary aspects of modern 
fiscal policy and theory or else that they were unwilling to show 
that the proportion of outlays to gross national product had fallen; 
because if they did, a case for a substantial rise in spending would 
be much greater. 

The Democratic Viewpoint 

In contrast to the Republican attack, one should compare Gov- 
ernor Stevenson's views as given in the 1956 campaign. (Later we 
shall discuss Kennedy's position. ) In his program paper, "Where Is 
the Money Coming from?" 4 Governor Stevenson laid down certain 
principles. He counted on a rise of the gross national product, a 
rise that had been anticipated also by Dr. Burns and other experts. 
He also assumed that this rise would automatically yield higher tax 
revenues, and that out of these additional tax revenues the govern- 
ment could afford to increase its welfare outlays. He had proposed 
certain programs in education, health, urban redevelopment, hous- 
ing and so on. He estimated costs at about $10 billion additional 
within ten years, or roughly 5 per cent of the expected rise in the 
gross national product. Indeed, he assumed that more money would 
be spent for security and also that additional outlays would be 
made by state and local government as well. Yet it was consistent 
with the Stevenson position that we could have more welfare ex- 
penditures and more defense expenditures as well as some reduction 
in the tax burden. 



The budget 133 

Relevant Aspects of Government Spending 

So concerned was the administration over spending that it was 
prepared to curtail defense expenditures greatly in order to cope 
with the alleged threat of national bankruptcy. But the administra- 
tion has had great difficulties in putting across its views on expendi- 
tures. 

It is not difficult to point out numerous obstacles to achieving 
lower budgetary expenditures. First, there is the defense problem, 
with relatively fixed obligations, although at one point the adminis- 
tration cut defense outlays by $10 million, a reduction that might in 
turn be related, in part, to the termination of the Korean War. 

Eisenhower's Budget Director, who had entered his office with 
a very strong desire to cut expenditures, was not nearly so optimistic 
after having a good view of the situation. By October, 1953, the 
Director of the Budget announced to his friends of the Economic 
Club of Detroit that cutting expenditures was not so easy as he 
had anticipated. 5 

The rise of prices, the increase in population, and the improved 
standards of living were all factors tending to raise public outlays. 
(The inflationary factor has become an important issue in the years 
since 1955.) But as prices and gross national product rise, the 
pressures on the budget grow, and during the Eisenhower adminis- 
tration prices did rise more than 10 per cent, so that these factors 
might very well explain an increase of spending of the order of $8 
billion. 

Again, costs of numerous nondefense programs rose automati- 
cally on the basis of existing legislation. For example, the Federal 
Government had to match the increase in public-assistance outlays 
by state and local governments. Again, as a result of the govern- 
ment's own policies, the rise in the rate of interest was a serious 
factor because it increased the cost of carrying the national debt 
substantially. 

In the early years of his administration, the President was 
thwarted in his program to reduce the budget by the strong efforts 
of the Truman administration, once the Korean War was on, to cut 
down all necessary nondefense expenditures. 6 Eisenhower had left 
this out of his calculations when he stressed during the campaign 
the drastic cuts to be made in public expenditures. 7 

A final factor that stumped the administration was the fact that 



134 ^0 THE ECONOMICS OF THE POLITICAL PARTIES 

the preceding administration had accumulated a large volume of 
obligations. Obviously, the administration would find embarrassing 
large obligational authority of preceding years, which meant that 
commitments had been made to spend money and, therefore, it 
would be so much more difficult to cut down expenditures. 

In his 1960 budget the President was clear on the difficulties 
involved inclusive of prior commitments: "Second, without one 
single new action by the Congress to authorize additional projects 
or programs, government outlays for some of our major activities 
are certain to keep on rising for several years after 1960 because of 
commitments made in the past." 8 

Economies 

In program after program, the administration made some cuts 
in the early years, but later restored them and even exceeded the 
Truman outlays. They did not find it any easier to resist these 
pressures than earlier administrations had. As the country grew, the 
need for public services increased even more. But the Republican 
administration, with a rather myopic view and concentration on the 
dollar outlays, failed to note the relevance of tfie size of the economy. 

In education, despite rather modest programs, after initial de- 
clines, outlays rose. Agriculture, which had cost an average of $1.5 
billion in 1951-1953, rose to more than $6 billion in 1959 and 1960. 
An initial reduction in outlays on natural resources was converted 
into an increase in the later years. The record looked particularly 
favorable from the viewpoint of the administration in housing; but 
here the sale of government-owned assets and the changeover to 
heavy recourse to guarantees gave a more cheerful view to the 
economizers than was justified by the facts. In public works, the 
reduction in the years 1955-1957 over 1951-1953, once we allow 
for price rises, was of the order of one third. But economies of this 
type in loans (a decline from $1,629 million average in the years 
1951-1953 to $337 million in 1955-1957) are scarcely genuine. To 
a considerable extent it meant not economies but curtailment in 
investments, which might have yielded large dividends. 

Perhaps one of the most significant reductions, which was con- 
tinued for a number of years, was that of appropriations to the Civil 
Service Retirement Fund. The government cut contributions in 1954 
by $368 million. It is of some interest to have Secretary Humphrey 
in 1957 before the Senate Finance Committee defend this cut in 



The budget 135 

contributions on the grounds that there is much to be said for a 
pay-as-you-go program. In other words, since today income exceeds 
outgo in the Civil Service Retirement Fund, and since the reverse 
will be true many years later, what Secretary Humphrey was sug- 
gesting was that money that might have been appropriated for the 
Civil Service Retirement Fund to meet later obligations should be 
withheld. The result would be a more favorable budgetary situation 
as appropriations are cut and spending reduced. This, of course, 
means a much larger outlay later, for included would be not only 
the money not appropriated but also the interest on this money. 
There is much to be said for a pay-as-you-go plan, but it would 
not be expected that this would be the plan supported by a Re- 
publican administration, and notably by Humphrey, for what is 
involved is borrowing from the Civil Service Fund in order to meet 
current needs. 

In part, of course, the government reduced its expenditures by 
cutting down on the assets acquired. To some extent these assets 
were self-liquidating and, therefore, the reduction was in invest- 
ments, not in expenditures. 9 

Many of the "economies" introduced by the administration 
were rather unwise. For example, a reduction in the appropriations 
for the Weather Bureau in fiscal 1955 was followed by a hurricane 
that probably cost the nation more than a billion dollars. Expendi- 
tures on the Weather Bureau, which were $26.4 million in 1954, 
were reduced to $25.1 million in 1955; then, following the hurricane, 
they rose to $27.4 million in 1956. 10 The government cut research 
outlays in such vital matters as treatment of salt water and sub- 
stitutes for oil and iron, reductions that were to haunt the President. 
Again, there were unjustifiable reductions in the personnel of 
the Bureau of Internal Revenue at a time when the general belief 
was that a substantial increase in the number of the employees 
would result in a multiple increase in revenue collections. (The 
Kennedy administration at the outset greatly increased the staff of 
the Bureau of Internal Revenue.) 11 Yet in 1955 the average number 
of employees was reduced from 7,822 to 7,757, a reduction of 1 
per cent. 12 

Yet in the big things it is not clear that the administration intro- 
duced much in the way of economy. Indeed, we do have the red, 
white and blue mailboxes that the Post Office Department had intro- 
duced, and we do have pens that do not get clogged up as they did 



136 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

during the Democratic administration. These may bring votes, but 
they are not terribly important. 

In an interesting study made by a well known British economist, 
Henry D. Lytton, the author found that labor productivity in the 
Federal Government had increased about 1.9 per cent per year 
over a period of ten years ( 1947-1957 ) . There were large variations 
among departments. This compares with 3.1 per cent for the whole 
economy. 

Perhaps of greatest interest for our purposes is to compare 
productivity per person from 1947 to 1952 (Truman) and 1952 to 
1958 (Eisenhower). The average annual rise is 1.93 per cent under 
the former and only 0.96 per cent under the latter. According to 
this expert, the productivity record for the Federal Government was 
especially bad in the years 1958-1960 inclusive. 13 

Bankruptcy? 

Let us take a larger view. In 1960 the estimated outlays for 
major national security were $45.8 billion, or $1 billion less than in 
1954. Relative to our gross national product, this represented a de- 
cline of one third in our outlays for national security. In view of 
the communist threat, the excessive concern over our budgetary 
situation in determining defense expenditures can scarcely be de- 
fended. I shall say more about this later. 

In a moment of pique I wrote the following. In spite of the 
circumstances, the letter is essentially correct even as I read it, five 
years later. (A large part is omitted. ) 

In his reply to Governor Stevenson, Vice President Nixon said of the 
Democrats that "they know that this [the Democratic military program] 
would force us into bankruptcy, that we would destroy our freedom in 
attempting to defend it." (Is this not a reckless charge?) In his budget 
address, the President said, "We cannot afford to build military strength 
by sacrificing economic strength." Secretary Humphrey and key Repub- 
lican Congressmen have made similar statements. . . . 

It is about time that we repudiated this foolish talk about bankruptcy. 
(This is aside from the surprising statement made by the Vice President 
that a financial bankruptcy means a loss of freedom in the same sense as 
a communist victory. ) 

I do not know what the Republican leaders mean by bankruptcy, but 
they certainly cannot mean inability to meet dollar obligations. Every 
sovereign power can meet the obligations expressed in its currency. . . . 



The budget 137 

[There follows a discussion of the unprecedented economic gains in 
twenty years.] 

In summary, the administration is being misled by unknowledgeable 
advisers. We have too many Secretaries of the Treasury and too few 
Secretaries of Defense. These false prophets of bankruptcy are "the 
prophets of gloom" because they underestimate our economic strength, 
and by weakening our military position they increase the probability of 
World War III and hence of bankruptcy. 14 

Public Versus Private Outlays 

Instead of a general opposition to public expenditures, we should 
consider the gains of additional public outlays against the costs to 
the taxpayers. In this connection here is a statement of a liberal 
businessman's group ( CED ) . 

Total expenditures should reflect comparisons of the benefits from 
government activities with the private product that is given up in order 
to pay for the government activities. We do not want to give up the mil- 
lion dollars' worth of consumer goods, for example, unless the spending 
of this money by government will give us services which we believe are 
at least as valuable, and we do not want government to provide services 
that could be provided more economically by private business. 

One has only to look at the large rise in the expenditures in 
unessential categories to realize that we could retrace our steps, 
and, for example, spend a billion dollars more for education or a 
billion dollars more for urban redevelopment and diminish expendi- 
tures, for example, on alcohol, tobacco, or even automobiles and 
luxury housing operations. In this connection it would even be 
worth while to put substantially heavier excise taxes on some of 
these luxury products, such as alcohol and durable consumer goods, 
in the same manner that the British have done in the last generation. 

A Spending Philosophy 

President Eisenhower and his advisors were strongly opposed to 
large increases in spending by the Federal Government. But they 
had other views on spending in other domains. In their view, it was 
a serious mistake for the government to get into debt, but appar- 
ently not for private enterprise or even for state and local govern- 
ments to do so. In his 1957 Budget, the President said: "We have 
freed the economy from needless controls and from inflationary 



1952 


1958 


222.9 


232.5 


25.8 


•50.9 


171.0 


236.0 


135.5 


238.5 


75.2 


144.3 


18.4 


27.5 


27.4 


44.7 



138 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

deficits, and have reduced the tax burdens which threatened to 
destroy the incentives to work and save and invest. State and local 
governments are now in an excellent position to obtain revenue and 
meet their responsibilities." 15 

It is interesting, therefore, to observe what had happened to 
various kinds of debt since 1952. 

table 10 

Debt Load of United States Government, State and Local 
Governments, Corporations and Individuals, in Two Recent Years 

(billion dollars) 
Owed by 
Federal Government, on a net basis * 
State and local government 
Corporations 
Total individual 
Mortgage 

Commercial and financial 
Consumer 

* Less securities held by government agencies. 
Source: President's Economic Reports. 

Note, in a period during which the federal debt rose by 5 per cent, 
the state and local debt doubled, corporate debt rose by close to 
40 per cent, individual debt by close to 80 per cent, mortgages by 
more than 90 per cent, and consumer debt by about two thirds. 

The President did not seem aware of the weak financial position 
of state governments. Nor did the President seem to realize that 
interstate competition prevents the states from assuming many 
responsibilities and that variation in fiscal capacity makes federal 
intervention necessary. If he had understood these facts, he would 
not have said: "The elimination of overhead — stopping, in other 
words, the freight charges on money being hauled from the states 
to Washington and back (a bill, I remind you, that is always col- 
lected in full) — would save the American taxpayer a tidy sum." 16 

Under-Secretary Burgess, a prime creator of Republican ideol- 
ogy, explained the administration's attitude. 17 

For Mr. Burgess the important point was that the creation of 
credit by banks for private enterprise produced goods that satisfied 
human needs; but a creation of money for the government was 
wasteful, and the debt unproductive. 



The budget 139 

. . . that is a point we always try to make, that when the Govern- 
ment spends money, it does not produce goods which the people can 
buy. . . . 

May I put it another way: that we ought to draw a distinction 
between productive debt and nonproductive debt. One comfort that I 
take out of the present inflation, which is a capital goods inflation, is 
that it is producing this great expenditure of capital for machinery to 
produce goods which will meet the demands of the people, so it contains 
within itself, I think, some of the needs of its correction. 

My able assistant, Richard Cooper, has pointed out to me that 
Mr. Burgess is in full agreement with the Soviets on this matter. 
The latter goes so far as to exclude government services entirely 
from their computation of national income. Are not public health, 
education, defense, and urban redevelopment as productive of hu- 
man welfare as refrigerators, TV sets, cosmetics and so on? 

The Issue of Cutting Taxes or Increasing Spending 

I shall discuss later in the chapter on Taxes and Fiscal Policy 
the issue of whether the appropriate policies, in order to deal with 
a recession, would be to cut taxes or increase spending. But I should 
point out here that it is Republican dogma that, if either must be 
used, the tax cut gets the preference. This was made clear in 1954 
and in the discussions since, and particularly by the President and 
ex-Secretary Humphrey. It is clear from Sherman Adams's book that 
Humphrey fought strenuously for a tax cut in 1956 in the midst of 
a great boom, in order thus to force cuts in expenditures on the 
government. 

In discussing the 1959 Budget, the Democratic Advisory Coun- 
cil made clear that its preference lay in an increase of spending, 
not for tax cutting. They said that President Eisenhower and his 
advisors "had decided that the American people want not advance 
but retreat, not expansion but contraction, not an imaginative 
step towards the future but a selfish and sullen retreat into the 
past. . . ." 18 

Summary 

Despite the strong claims made by the President in 1952, on the 
whole he was unsuccessful in bringing spending down. He had a 
temporary triumph in reducing expenditures early in his administra- 
tion by $10 billion. But one may raise a question whether the loss 
to our national security did not make this a very costly process. 



140 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

Yet, in relation to the gross national product, the achievement of 
the administration, given its objectives, was creditable. But the 
administration was unwilling to tie expenditures to the gross national 
product, undoubtedly, in part, because such admission would invoke 
larger expenditures. Indeed, the administration had neurotic fears 
of bankruptcy, and because of this unreasoning fear tended to deny 
necessary services to the people. It never did present an argument 
of the relative cost to the nation of an increase of a given amount of 
taxes and what the nation would be deprived of, as against what 
would be provided by the new services. My criticism of the admin- 
istration and Republican policy is not that it promised large cuts 
and did not deliver. This is true, but, in the larger national context, 
one must criticize it for failure to meet our national needs. 

The high level of expenditures required for security, the rise of 
gross national product with the increased population, productivity, 
higher prices, and higher standards, the lack of control over rises 
under such commitments as public assistance and veterans' pay- 
ments, the failure of the agricultural policy, and the high money rate 
policy were among the elements that made it very difficult to reduce 
total federal spending. It is not clear, moreover, that any large 
efficiencies could be introduced into the federal operations as had 
been persistently promised in 1952. In fact, the only significant study 
available shows smaller gains in government productivity under 
Eisenhower than under Truman. 

This great concern for balancing the budget might have called 
for large increases in taxes as well as a high level of services. That 
it did not, suggests that what the administration and its supporters 
really feared is government activity, in turn related to creeping 
socialism. The cries of "inflation" and "the unbalanced budget" now 
ring out where "creeping socialism" used to. 



16. Misleading budgets 



}0, Our federal budget includes expenditures for consumer goods I 
and services of all kinds. But it includes also expenditures for in- 
vestment goods: for example, construction and loans. Unfortunately, 
we do not distinguish between an investment, such as TVA, and 
an "exhaustive" expenditure, such as some ammunition to be blown 
up or the pay of government clerks. 

It is possible to give a misleading impression of the budget. For 
example, sales of mortgages are reflected in the budget in the same 
way as an increase of tax receipts would be, even though actually 
what has happened is an exchange of a capital asset for cash. 
Similarly, the government can depend on guarantees rather than 
loans; the first is not a budgetary item, the second is. Or the govern- 
ment may divert payments for pension funds into regular receipts. 
Receipts then are shown to rise, though what actually happens is 
an increase of debts. 

The Eisenhower administration has used these techniques, as 
well as excluding whole programs (for example, interstate roads) 
from the budget on a scale never before used. Hence the genuine 
budgetary situation is much worse than it seems to be. 

In the preceding chapter we suggested some doubts about the 
true state of the budget. Obviously, if the government cuts down 1 
the acquisition of assets, and especially those which are self -liquidat- 
ing, this is not a genuine reduction of expenditures but rather a 
reduction of investments. 

If the government, instead of borrowing directly, has one of its 
agencies borrow, with the result that the borrowing is not put down 
as an expenditure, and hence as part of the national debt, then to 
that extent, this practice is misleading — for example, the Federal 

141 I 



142 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

National Mortgage Corporation borrowing instead of the Treasury. 
If the government proposes a $100 billion road program and sug- 
gests that this be kept outside of the budget so that the borrowing 
is not part of the national debt and the expenditures are not part 
of the budget, then to that extent, the budget becomes a misleading 
one. Yet this is what the administration recommended originally in 
its $100 billion road program. It ultimately settled for a smaller 
program, but still one that was to be kept outside the regular budget. 
Large cuts in road expenditures are now shown in the budget, while 
actually record increases in these outlays occur. 

The administration has not always introduced these devious fi- 
nancing methods merely to mislead the public. At times it was forced 
to resort to such devices by the ceiling on the national debt; at other 
times it was motivated by its belief that the government should 
not compete with private enterprise and that therefore private enter- 
prise should undertake tasks previously undertaken by the govern- 
ment. Nevertheless, many moves on the part of the government 
can be associated with the desire to show a better budgetary situa- 
tion than really prevailed. 

Some evidence of this is suggested by the growth of loans and 
investments against guarantees. In housing, for example, the trend 
has distinctly been in favor of guarantees against loans. Loans and 
investments count as budgetary expenditures, but guarantees do not. 
In the fiscal year 1954 there were $15.5 billions of loans and invest- 
ments outstanding and $40.5 billions of guarantees. For 1960 the 
estimated figures are $22.6 and $82.3 billion respectively. The rise 
for guarantees is more than 100 per cent and that for loans and 
investments less than 50 per cent. For fiscal year 1960 it was esti- 
mated that loans would rise by $800 million- and guarantees by 
$12.2 billion, or that loans would increase only 7 per cent as much 
as guarantees. The Eisenhower administration never estimated what 
these guarantees may ultimately cost. Their enthusiasm for guaran- 
tees was unlimited. In vetoing the 1959 Housing Act (S. 57), the 
President asked for unlimited guarantees but was vigorously op- 
posed to a $50 million loan program for academic buildings. 

An absorbing interest in the budgetary account rather than in 
the budget explains to some extent the early enthusiasm of the 
administration for liberalizing the Old Age and Survivors' Insur- 
ance Program. Here again is a trust fund, and even though liberali- 
zation means much larger expenditures and even a rise in current 



Misleading budgets 143 

payroll taxes, the burden of these expenditures will be especially 
large in later years; besides, the expenditures for benefits do not 
appear in the budget. 

Here are some examples of these trends. In the four fiscal years 
1954-1957 the Eisenhower administration disposed of $1,780 million 
of certain capital assets ( for example, mortgages, loans on commodi- 
ties); in the four preceding years the Truman administration had 
disposed of about $364 million of corresponding assets. These sales 
yield cash, and income rises relatively to outlays. But though the 
budget comes nearer to a balance, the net effect is no genuine 
improvement: one capital asset is sold and the income is used to 
pay off debt or keep debt from rising. 1 

Again, instead of building new post offices, the government 
proposed to rent from private builders. The current budgetary 
outlays are thereby greatly reduced, but perhaps at great cost in 
the long run. These policies save substantial appropriations of 
federal funds and the resultant Federal Building Improvement 
Program would be financed with private funds under the lease- 
purchase authority of the General Services Administration and the 
Post Office Department. Actually, the government soon cooled on 
this program, and was not so enthusiastic as it had been earlier. 

In an interesting study of this problem, Dr. Gerhard Colm 
showed that the additions to federal Civil Type Assets plus Atomic 
Energy Plant and Equipment and military stockpiles declined from 
$6,612 million in fiscal 1953 to an estimated $3,300 million in 1956. 
But he also writes : 

There have recently been various developments affecting the budget 
which are closely related to the above discussion of loan-financing rule 
as to merit mention in this context. ... (1; They [these changes] 
reduce the deficit in the conventional budget, at least temporarily, as 
compared to what it would otherwise be. (2) They involve the financing 
of capital assets on credit. 2 

Referring to the 1953 episode, Dr. W. W. Heller writes as fol- 
lows: 

Simultaneously, the fiscal authorities found an escape valve that has 
been utilized many times since, namely requesting federal agencies to 
finance themselves by direct operations in the money market rather than 
through Treasury borrowing. The Commodity Credit Corporation led the 



144 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

way by selling $1.2 billions of certificates of interest to the commercial 
banks during the second half of 1953 against a nation-wide pool of price 
support loans on grain. The amount stayed out of the national debt and 
the nearly 1 billion dollars still outstanding on June 30 quietly disappeared 
from the fiscal 1954 Federal Budget. 3 

When confronted with the Eisenhower $101 billion highway 
program, Senator Byrd, the Chairman of the Senate Finance Com- 
mittee, said: "Such procedures violate financing principles, defy 
budgetary control, and evade federal debt law." 4 

The Republicans, in short, had recourse to dubious ways to give 
an indication that the budget was really smaller than it actually 
was. Among the practices used were not to appropriate money equal 
to what had been earned by trust funds such as the Civil Service 
Fund, borrowing outside the Treasury and, therefore, funds so 
borrowed not being included in the national debt, sale of assets by 
the government inclusive of mortgages and claims on commodities, 
financing capital improvements by paying rent instead of capital 
expenditures as in the past, and, finally, setting up trust funds as a 
means of excluding expenditures from the budget and any impact 
on the debt — as, for example, in the financing of the interstate road 
program. Had accounting practices of the Truman administration 
been continued, both the budget and the national debt would have 
been several billions higher in 1960 than actually were recorded. 
Some of these practices will be found in other administrations; but 
the Eisenhower administration was unique in the discovery of new 
approaches and the extension of old ones for the purpose of mis- 
1 leading the public on the true state of the budget. 



17. Tax and fiscal policy 



Introduction 

In no area is there a greater conflict of ideologies and economics i 
between Republicans and Democrats than in taxation. 

For the Republicans the goals are a balanced budget, reduced 
government expenditures and reduced taxes. Democrats are more 
interested in the use of tax policy to stabilize and stimulate the 
economy and to achieve a more equitable distribution of income. 

A balanced budget was the number one objective for President 
Eisenhower's administration. This emphasis suggests a failure to 
understand the A B C's of modern fiscal theory. The budget is a 
means, not an end. Deficits are defensible if the gains to the econ- 
omy warrant them, and surpluses should be sought in periods of 
inflation. President Truman realized this in the early postwar period, 
as his Congressional opponents did not. 

Indeed, the Eisenhower administration at times abandoned its 
objective of a balanced budget. In 1954, the pressure for tax cuts 
was insistent, and the budget was unbalanced. The concessions 
made were largely to business and high-income groups, the justifica- 
tion being the need for growth. The administration failed to make 
effective use of modern fiscal theories to justify tax cuts. In 1955 
the Democrats, seeking a fair deal for the small taxpayer, sought a 
$20 tax credit. But the administration opposed it. 

In the light of Republican economics and ideology, the changes 
in tax structure since 1952 are along expected lines. The concessions 
to high-income groups have been important, and the burden on 
state and local government, with their regressive tax systems (that 
is, higher burdens on low incomes), greatly increased. In putting 

145 



146 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

across this tax program, the administration presented some mathe- 
matics which could scarcely pass the eighth grade. 

Taxes and the Economy 

Secretary Humphrey, in an important address in 1954, stressed 
the point that tax reduction was not introduced to increase private 
expenditures in a period of recession and thus to ward off a decline. 
He added: "Without the saving in proposed spending, there could 
have been no relief for anyone. Because of these savings, and only 
because of them, this record-breaking tax-cutting program of more 
than $7 billion is possible." * In this connection, it is of some interest 
that the administration objected to the reduction of excise taxes 
voted by the Congress in the midst of the 1954 recession. 

Perhaps before going further we ought to indicate very briefly 
what we mean by adequate fiscal policy. Modern fiscal policy goes 
back to the writing of Lord Keynes, who more than anyone else 
has influenced economic thinking in this area. Simple arithmetic 
suggests that when the private economy is spending too little and, 
therefore, we are in the midst of a depression or recession, the gov- 
ernment should spend more or tax less. The result would be that the 
public would then have more money available for spending, es- 
pecially as a result of the fact that as the government spends more, 
additional funds flow into the hands of the spending public, who in 
turn spend a large part, and so on. 

In periods of prosperity and inflation the government should 
operate in a somewhat different way. As spending rises to excessive 
amounts with inflation prevailing, the government should spend 
less and tax more. In the recession period public debts should rise; 
in the periods of great prosperity the public debt should fall. In 
this way government adds to demand in recession and reduces it 
in a boom. 

This is very simple theory, but it is not always very easy to 
apply it. For example, it is always easier to cut taxes than it is to 
increase them, as may be required in a boom. Furthermore, it is 
often difficult to adjust spending to the requirements of the business 
cycle. By the time the expenditures are ready to be made the eco- 
nomic situation may have changed greatly. Moreover, correct fiscal 
policy is not the only objective of governmental tax and spending 
policies. For example, we may be in the midst of a boom and yet 
the need of defense expenditures may be so great that we may 



Tax and fiscal policy 147 

actually increase spending rather than reduce it. It may even be 
possible that our educational system is so bad that despite the 
inflationary effects of spending it may be desirable to spend a billion 
dollars more on education. But in a general way the principles hold: 
spend less and tax more in prosperous periods and spend more and 
tax less in depressions. 

It is fair to say that not all Democrats have swallowed this 
theory, and there are many who do not adhere to it. But on the 
average more Democrats than Republicans have accepted modern 
fiscal theory. 

Our first great test in recent years was, of course, in the recession 
of 1953-1954. In the January, 1954, Economic Report the President 
said: "Government must use its vast power to help maintain em- 
ployment and purchasing power as well as to maintain reasonably 
stable prices. ... It must be prepared to take a preventive as 
well as a remedial action. . . ." 

The Joint Committee on the Economic Report, controlled by the 
Republican party, emphasized, for example, the following: 

There is a general feeling that the basic economy is essentially 
healthy . . . 

... If the government accepts its responsibility to create a climate 
and to pursue programs which will advance the objectives of the Employ- 
ment Act, we believe that the complementary private demands for invest- 
ment and consumption will be sufficient to forestall serious economic 
declines and to bridge any deficiency or gap which may appear. 

But the Committee was very vague as to what specific measures 
might be used and did not really indicate the measures to be used. 2 
The Democratic members of the Committee were critical of the 
administration for not then recommending concrete measures. 3 

But it should be said in defense of the administration that taxes 
were cut in 1954, though the major cuts had already been provided 
for in earlier legislation. In 1954 also the President talked as though 
he had had some instruction from Lord Keynes, but this was the 
last time. From 1956 to 1959 the President's interest was primarily ' 
in balancing the budget. He would promise a tax cut only if there 
were an adequate surplus. In other words, when inflation was 
rampant he would accelerate the inflation by leaving the private 
economy with more cash as a result of a tax cut. It was quite clear 
that tax cuts would not be used in order to deal with a recession. 



148 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

In 1958-1959 the President made this adequately clear. Perhaps the 
outstanding statement was one that was made by Secretary Hum- 
phrey at the news conference reported in The New York Times, 
January 18, 1957. 

I will contest a tax cut out of deficits as long as I am able. I will not 
approve, myself, of a tax cut out of deficits. I think it would start a down- 
ward spiral that would be serious. ... I don't think you can spend 
yourself rich. I think we went all through that for a good many years 
and we kept spending and spending and spending, and we still didn't 
help our employment or help our total position. 

Secretary Humphrey indicated that he would resign rather than 
approve deficit financing in case of a recession. 

Administration attitude toward a tax cut to treat a recession is 
well illustrated by a statement of Secretary Anderson before the 
Joint Economic Committee early in 1959. 

. . . Had we resorted to a tax cut we would not have had the demon- 
stration of the economy's inherent recuperative powers. We would have 
helped develop a philosophy that tax relief was necessary to pull us out 
of the dungeon. 4 

It is surprising that the administration did not realize that the 
large deficit of fiscal year 1959 played a very important part in 
getting us out of the recession. The Secretary himself admitted that 
half the $12.9 billion deficit was the result of a short fall in revenues 
and the other half, of course, an increase in expenditures over the 
original budgetary estimates. In other words, there had been an 
automatic cut in taxes as a result of the decline of income. Without 
this large deficit in fiscal year 1959 the recovery would have been 
greatly delayed. I should add that the rise of outlays was in part not 
the result of countercyclical policy. 

After 1956 it was quite clear that the administration would not 
only not cut taxes to deal with a recession, but it would not increase 
expenditures. In the Economic Report of the President, 5 the Presi- 
dent made it quite clear that if there were a surplus it would be used 
to repay debt. This is sound economic policy in a period of pros- 
perity. 6 

The Joint Congressional Committee on the Economic Report was 
very critical of the new governmental policy: "Now he [the Secre- 



Tax and fiscal policy 149 

tary of the Treasury] states that general tax cuts should be provided 
only when the Federal Government's budget shows a surplus, 
ignoring the fact that tax reductions under those circumstances 
may well be inflationary. ..." 

In his campaign Governor Stevenson also had something to say 
about proper fiscal policy. 

Obsessed with the idea that the budget must be balanced at all costs, 
and at all times, and eager for political tax reductions, it [the Eisenhower 
administration] has made the attempt to reduce the budget the center of 
government policy. This has been largely at the expense of our national 
security and other necessary government services, and has made us fail 
to weave government tax and spending policy into the fabric of private 
economy. 7 

In contrast to the lack of comprehension of the Eisenhower ad- 
ministration, the Joint Congressional Committee, spearheaded by 
Senator Douglas, revealed a striking command of modern theories. 
They had held exhaustive hearings, and prior to these hearings 
seventy-nine experts presented the most extensive analysis of taxation 
ever presented to any Congressional committee. 8 This was indeed 
a grueling punishment for any Congressional committee to invite. 9 

This Committee observed: 

Federal tax policy should recognize that the level of tax revenues in 
relation to the amount of government expenditures has an important 
bearing on the level of economic activity. . . . This would tend to result 
in federal surpluses and debt retirement during prosperous and boom 
periods and deficits during recessions and depressions. 10 

What particularly irritated the Democrats was the appeal to tax 
reduction in 1954, even though the President and his Secretary of 
the Treasury had urged the primacy of a balanced budget when 
the budget was unbalanced, and the repudiation of the same policies 
— that is, tax reduction — in 1955, when the Democrats urged tax 
reduction. They could not understand why the President used the 
balanced-budget argument against their proposed $20 tax credit in 
1955 and had invoked tax cuts despite an unbalanced budget in 
1954. The administration might have contended that in 1954 there 
was a recession and in 1955 a recovery was on the way — though 
this was not so clear at this time. 



150 }gi THE ECONOMICS OF THE POLITICAL PARTIES 

Nowhere in administration policy statements does the student 
find an analysis of future demand for the output of a full-employ- 
j ment economy and its relation to government fiscal policy, such as 
that, for example, issued by Professor Hansen and Dr. Colm and 
the National Planning Association. It is clear that the economy has 
been kept operating at a high level as a result of continued rise of 
government spending on security. Once this rise is stopped or secu- 
rity expenditures decline, then the increased demand required to 
take current production off the market must come from other govern- 
ment outlays, and/or rises of consumption, and/or investment. There 
are some doubts that, with the policies of 1952-1960, investment can 
continue to rise at the present rate. 11 

Obviously such an analysis will not be forthcoming from an 
administration whose major objectives are: 

1. Lower taxes. 

2. Lower government expenditures. 

For the administration, these greatly outweigh the objectives of a 
stable and growing economy, whatever lip service is paid to the 
growth problem. 

Not only could the Democrats point to a failure to seek out 
economic advances in the area of taxation, but they could also 
indicate a failure on the part of the Republicans to follow the 
simple rules long ago set out by Keynes and now generally ac- 
cepted by economists. Indeed in 1954 a tax cut helped shorten 
the recession; the Republicans inadvertently had become Keynes- 
ians. 

In 1948 President Truman, conversant with modern fiscal theo- 
ries, vetoed a Republican-inspired tax-reduction bill: "This bill 
would undermine the soundness of our Government finances at a 
time when world peace depends upon the strength of the United 
States. . . . The resources and labor force of this country are fully 
employed. Under the circumstances the tax reduction could only 
result in higher prices — not in high production." (Veto message of 
April 7, 1948.) 12 

Taxes and Investment 

Above all, the Republicans justified their tax policy as one stimu- 
lating investment and hence growth and jobs. They had to cut taxes 
in the manner of 1954 in order to assure the growth of the economy. 
They were hard put to it to use this argument for their tax policy 



Tax and fiscal policy 151 

in view of the tremendous expansion of the economy and rising 
taxes under twenty years of Democratic rule. 13 

Apparently the growth since 1932 escaped the government, for in 
a speech of October 21, 1954, the Secretary of the Treasury said: 

. . . we found the economy blown up with the hot air of inflation to 
a point where there was a real danger that it might burst, letting us down 
with a crash that would have maimed us as a nation, and dropped the 
free world's defense invitingly low. 

We found the economy's growth hampered and hobbled by a tangle 
of successive layers of regulations, controls, subsidies and taxes imposed 
in past emergencies. . . , 14 

In the light of the gains of the economy since 1932 and even 
1945 and the virtual stabilization of prices from 1948 to 1953, ex- 
cept for a 10 per cent rise associated with the Korean War, this 
statement seems scarcely reconcilable with the facts. 

On April 7, 1954, in discussing the Tax Revision Bill, the Secre- 
tary said: "Third . . . and most important of all . . . it will help 
our economy grow, help new business to start, old businesses to 
modernize, and to help make more and better jobs. . . ." 15 

In the light of President Eisenhower's Economic Report of 1954, 
where "the upsurge of production and employment, which has been 
sustained with but brief interruption in the United States for about 
a dozen years," was stressed, it is not easy to share the administra- 
tion's concern that its tax revision was a sine qua non for continued 
growth. 16 

Professor Keith Butters, after the most careful survey ever made, 
concluded: ". . . The evidence indicates that the accumulation of 
investible funds by the upper-income classes has been consistently 
large during post-war years, despite the existing tax structure, and 
that individuals with large incomes and substantial wealth continue 
as a group to hold and invest a large proportion of their funds in 
equity-type investments." 17 

Issues of Equity 

For the Democrats a crucial issue is equity. They acknowledge 
the importance of fiscal policy and its contribution toward stabiliz- 
ing and expanding the economy. But in contrast to the Republicans 
they weight equity heavily. This is a matter of degree. Thus the 
Democrats strongly oppose excise taxes because they bear heavily 



152 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

on the low-income groups and because they are not responsive to 
business fluctuations, and hence from a fiscal viewpoint are not 
particularly effective. Perhaps they would be less critical of excise 
taxes if the proceeds were used to expand essential welfare pro- 
grams. I am very sympathetic with the persuasive argument pre- 
sented in Galbraith's Affluent Society on this issue. But the Repub- 
licans, stressing the heavy burden of direct taxes on high incomes 
and savings, emphasize the relation of taxes and investment much 
more than stabilization or equity. Again, the Democrats tend to 
burden the Federal Government vis-a-vis state and local govern- 
ments, and in part because the latter governments raise their rev- 
enues largely through sales and property taxes which heavily bur- 
den the low-income groups. As Senator Douglas put it: 

. . . property taxes from which seven-eighths of local revenue is 
obtained are imposed at higher effective rates upon the homes of the 
lower-income groups than upon the mansions of the wealthy or upon 
industrial or commercial property. Similarly, State Governments derive 
about two-thirds of their revenue from some form of sales taxation, 
whether this be general sales taxes or specific excise taxes such as a 
gasoline tax, a liquor or cigarette tax, or a motor-vehicle tax. These taxes 
are quite markedly regressive. 18 

In his statement, Where Is the Money Coming from? (October 
28, 1956), Governor Stevenson dwelt on this problem of tax evasion: 

The income tax problem over the middle and higher income brackets 
is a different matter. We have built up in this area what appears on 
paper to be a highly progressive surtax rate. But over a period of years 
we have added special provisions to our tax laws under which an increas- 
ing proportion of the income of middle and upper bracket taxpayers is 
taxed at much lower rates, or even escapes tax entirely. 

In the 1954 Tax Bill, the administration increased the number of 
loopholes. Unfortunately, a loophole that favors one group is likely 
to result in granted demands to others who seek similar advan- 
tages. 19 

In a thorough survey of the increasing evasion under the 1954 
act, one writer says: "The law is being riddled with special pro- 
visions while we preserve the fiction of uniformity and equity. I 
believe that there is a basis for alarm over this trend." 20 



Tax and fiscal policy 153 

In its 1954 Tax Revision, the administration, as we shall see, con- 
centrated its gains on high-income groups. Little attention was paid 
to inequities or closing of loopholes. In contrast, the Truman ad- 
ministration, in proposing a cut in excise taxes in 1949 and in seek- 
ing more revenue after the Korean War, emphasized the need 
among other things of removing tax exemption on state and local 
securities, tightening up the collection of interest and dividends, in- 
creasing taxes on privileged financial institutions, reducing percent- 
age depletion and offsets against capital gains. 21 

Senator Douglas in 1956 would have drastically reduced deple- 
tion allowances, collected taxes on dividends at the source, ended 
the abuse of split incomes, would more rigorously have dealt with 
capital gains and so forth. The gains of revenue might well have 
been $6 billion yearly. 22 

Conflicts of Economics and Ideologies and Tax Structure 

Perhaps the conflict of views is evident in the defense by the 
President of the 1954 proposed tax bill and the attack by Speaker 
Rayburn. 23 The President concentrated on the importance of taxes 
to finance the large welfare programs contemplated ( How many of 
these promises were kept?); on the gains of all taxpayers from 
various provisions (most of these did not provide much relief for 
low-income groups); and especially the relation of taxes to invest- 
ments. Speaker Rayburn compared the gains of the high-income and 
the low-income groups. 

President Eisenhower said: 

I know how burdensome your taxes have been and continue to be. 
We are watching every expenditure of Government — to eliminate waste, 
duplication and luxury. But while we are insisting upon good management 
and thrift in Government, we have, at the same time, asked the Congress 
to approve a great program to build a stronger America for all our people. 

Most of these things cost money. Without adequate revenue, most 
of them would be abandoned or curtailed. . . . 

Speaker Rayburn said the following: 

On this question of taxes, the Democratic party has had a consistent 
philosophy through the years. We have measured our tax programs against 
two standards: 



154 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

Is it fair to all of the taxpayers, to the great majority of taxpayers who 
have small incomes? 

Is it good for the economy as a whole? 

The Republicans have also had a consistent philosophy on the matter 
of taxes. 

Their philosophy is that if they give tax relief to those in the high 
income groups, some of the benefit may eventually "trickle down" to the 
great majority of taxpayers. This "trickle down" has never come about, 
in all history of Republican tax laws. . . . 

Above all, the Eisenhower administration was interested in the 
welfare of the savers, the high incomes, and of business. In contrast, 
the Democrats were primarily interested in the tax burden of low- 
income groups. Whereas the Republicans fought for tax programs 
that in their opinion would increase investment, the Democrats 
sought tax programs that would result primarily in tax relief for 
the many who in turn would increase expenditures on consumption 
goods. Senator Fulbright showed the foolishness of inducing further 
investment through tax cuts when "markets do not expand enough 
to absorb the output of existing capacity, much less the additions." 24 

Not impressed by the relation of taxes and investment and aware 
of the relation of consumption and investment, the Democrats con- 
tended that the condition for investment was more consumption. 
Secretary Humphrey expressed the Republican emphasis both on 
entrepreneurship and investment. 25 

In the light of this conflict of ideologies and economics, let us 
consider what has been happening to our tax system. 26 

1. Federal Taxes, Fiscal Year 1953 to 1960 (estimated) 

Personal Income Taxes = +$10.6 billion, or 35 per cent (de- 
spite the decline of rates in 
1954) 

Corporation Income Taxes = +$0.2 billion, or 1 per cent (de- 
spite a rise of corporate profits 
of about $8.7 billion, or 23 per 
cent ) 27 

Excise Taxes = — $1 billion, or 10 per cent, but $3 

billion out of gas taxes to be 
paid out of trust funds for high- 
ways are not included here 



Tax and fiscal policy 155 

Payroll Taxes F.Y. 1952 = $7.4 billion 

F.Y. 1957-58 = $11.9 billion, rise of 33 per cent 

These figures point to relatively increased loads on low-income 
groups. 

2. Gains of State and Local vis-a-vis Federal Taxes. The Eisen- 
hower administration time and again has urged transfers of respon- 
sibilities from federal to state and local governments. Bankruptcy is 
a danger for the Federal Government, but apparently not to these 
other governments, which have limited borrowing power and have 
yielded the most lucrative taxes to Federal Government. The Hoover^ 
Commission would provide federal cash only to "further or safe- 
guard the national interest or to accomplish broad national objec- 
tives. . . ." 28 The Commission on Inter-Governmental Relations 
wrote : "However, concern about the $275 billion debt and about the 
effects of increases in debt may bring pressure for holding down 
national expenditures and may result in a corresponding increase in 
the responsibilities of state and local governments." 29 

As larger burdens are put upon the state and local governments, ■" 
the tax system becomes more and more regressive; in other words, 
the taxes are borne increasingly by those least able to bear them. 
Direct (income, corporation, and so on) taxes of the Federal Gov- 
ernment are relatively five times as heavy as with state and local 
governments: that is, direct taxes as a percentage of taxes are five 
times as great in the federal tax structure: state and local govern- 
ments depend primarily on sales, excise and property taxes. 

As might be expected, the Eisenhower administration would ^ 
have welcomed a substantial sales tax. This was made clear in R. J. 
Donovan's Eisenhower: The Inside Story. 

On August 27, 1953, the Secretary of the Treasury admitted that 
a sales tax was under consideration, and The New York Times 
wrote: "A reliable Administration informant said today the question 
of a Federal sales tax was very much in the picture." 

The 1954 Tax Reduction Bill 

In the light of Republican economics and ideology, the 1954 tax 
cuts were about what might have been expected. Indeed, the Con- 
gress saved the administration from further embarrassment by re- 
ducing the benefits to business and dividend recipients. As it was, 



156 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Senator Gore, reporting on the 1954 campaign, could brag that the 
tax bill was the most effective issue for the Democrats. 

But the National Democratic Committee ( Fact Sheet, March 15, 
1954) was quick to point out that the bill approved by the House 
Ways and Means Committee would yield but 6 per cent of the tax 
relief to taxpayers with incomes of less than $5,000, 30 per cent to 
those with incomes in excess of $5,000, and 64 per cent to corpora- 
tions. Of the bill passed by the House, the Democratic party esti- 
mated the cost of the dividend credit at $800 million per year. ( The 
Ways and Means version provided concessions of $1.2 billion. ) Yet 
on the basis of Federal Reserve studies, it was clear that stock owner- 
ship was heavily concentrated. 

The Republican House Ways and Means Committee tried des- 
perately to minimize the costs of the tax bill: first by estimating only 
for fiscal year 1955; second by noting (and wrongly) that the de- 
preciation allowance was only a transfer of income over time; and 
third by putting against the reductions in corporate taxes the "gain" 
associated with the extending of the 52 per cent rate for one year. 30 

The Minority also showed that in a full year the exclusion from 
income and tax credit for dividends would cost the government 
$814 million, and that despite the fact that 92 per cent of the Ameri- 
can families own no stock and that 80 per cent of families with in- 
come of less than $5,000 receive less than 11 per cent of dividend 
income. 31 

Professor Heller put the bulk of the $3 billion reduction of in- 
come taxes (offset by $1.5 billion rise of consumption taxes) as a 
boon to consumption as well as the billion-dollar reduction in ex- 
cises and the $0.5 billion relief for individuals. But the remainder of 
$4.5 billion was to stimulate investment. 32 Hence it might be said 
that 60 per cent of the tax concessions were made on behalf of in- 
vestment, despite the fact that investment averaged less than one 
quarter of consumption. 

Republican changes in the tax structure are not what might be 
expected in view of the speeches made by their candidate in 1952. 
One might have anticipated a strong move to cut excise taxes. The 
government has not dealt with the taxpayer of whom candidate 
Eisenhower said, "By the time he eats his egg he pays 100 taxes, 100 
different taxes" (Jacksonville, Florida, September 2, 1952) "or who, 
when he buys an automobile, . . . pays 200 taxes . . . there are 



Tax and fiscal policy 157 

150 different taxes on every woman's new hat" (Des Moines, Sep- 
tember 18 ) . 

President Kennedy in his 1961 tax bill would also stimulate in- 
vestment through an investment tax credit program. But he would 
tie tax relief to increases in investment, and he would offset resultant 
tax losses by additional taxes on higher income groups. 






18. Failure of debt management 



Introduction 

This is a long chapter and perhaps a little technical. The busy 
reader may prefer to read this brief introduction. 

What were the Eisenhower administration's major objectives in 
the field of debt management? Above all, they wanted a free market 
for government securities without interference by the Federal Re- 
serve, a rise in interest rates in response to the elimination of artifi- 
cial support; a rise in the average maturity of the debt; a reduction 
of holdings by banks and a corresponding decline in the supply of 
money and a reduction in the size of the debt. 
I Eight years later we can see nothing but failure. Indeed rates 

are higher; the costs of financing the debt are up by $2 billion or 
one third. These are scarcely symptoms of success, for they could be 
thus interpreted only if the objectives of seeking higher rates had 
also been achieved: more savings, more purchases of securities out- 
side of the banks, no inflation, and so forth. 

Other failures are also relevant. The support by the administra- 
tion of a rigid debt ceiling contributed to wastes of spending, delays 
in defense, borrowing at higher rates than otherwise would have 
been necessary, and less than adequate measures to deal with reces- 
sion. 

In its anticyclical policy the Treasury was also remiss. Its ide- 
ology gave interests of private markets priority over public interests. 
Hence in prosperity it refused to issue long-term securities to raise 
interest rates, as an antiboom measure, and in recession it delayed 
recovery by issuing vast amounts of long-term issues and thus de- 
priving the economy of part of the fruits of a cheap-money policy. 
158 



Failure of debt management 159 

A policy of noninterference in the debt market is part of the 
value system of the administration. But the result of this policy has 
been disastrous: higher rates brought a desertion of the bond 
market and the most serious financing problems the Treasury ever 
faced in the twentieth century in peacetimes. Yet the Treasury and 
the Federal Reserve deny any responsibility for the rise of rates. 
Nevertheless the government never quite repeated the mistakes of 
1953 when under Treasury leadership an attempt was made to raise 
rates drastically. 

The observer is also struck by the fact that, though the govern- 
ment was determined to balance its budget and the Federal Reserve 
to fight inflation, they adopted some policies that were inconsistent 
with these objectives. Thus the administration supported a 1959 
change in reserve requirements, even though the effect would be to 
increase profits of financial institutions at the expense of the govern- 
ment. And the Federal Reserve agreed to these changes, even though 
the net effect would be to weaken the fight against inflationary 
policies. 

Often there are conflicts. The Federal Reserve wants to stop 
inflation; but, controlled by financial interests, it takes steps to help 
financial interests through reducing reserve requirements, even 
though the antiinflationary weapons are thus blunted. Again, the 
Treasury wants to balance the budget, but the quest for the free 
market greatly increases the cost of financing the national debt. 

I now return to the problem of debt management, which con- 
cerns both the Treasury and the Federal Reserve and has often been 
a matter of dispute between these two agencies of the government. 
The amount of debt issues, the rate at which they are issued, the 
maturity, and the time of issue are all important factors in the eco- 
nomic situation. In the management of its debt the Treasury must 
have the cooperation of the Federal Reserve and the monetary 
authority generally. 

The Size of the Debt 

The country is greatly concerned over the $290 billion gross 
($241 billion net) national debt. Democrats are almost as much 
worried about this as are the Republicans. Indeed there is a limit to 
the growth of debt; beyond a certain point, the growth of debt may 
involve a country in serious inflation and ultimately failure to pay 
off the debt except in greatly depreciated currency units. But it is 






160 }0, THE ECONOMICS OF THE POLITICAL PARTIES 

of some interest that in 1960 the federal debt was only $11 billion, 
or 4 per cent larger than in 1945. In the same period the gross na- 
tional product had risen by l 1 /^ times. In other words, the weight of 
the debt in relation to the output of the nation had declined by 56 
per cent. National debt rose by $269 billion from 1932 to 1960, but 
against an increase in the financing cost of the debt of about $8 
billion, the rise of the gross national product has been $445 billion, 
or more than 50 times as much. Of more relevance, the rise of na- 
tional income was almost 50 times that of the rise in interest on the 

I debt. This certainly does not suggest impending bankruptcy. 

^ So long as the growth of debt does not get out of line with the 
growth of income there is nothing much to worry about. Certainly 
in recent years income has increased faster than debt. 

In this connection the British experience is of interest. In 1818 
after the Napoleonic Wars the British had a national debt of £840 
million, or more than twice the size of its national income. (Our 
debt is considerably less today in relation to the national income, and 
today tax systems are much more productive and flexible. ) Ninety- 
five years later (1913), though only about 20 per cent of the debt 
had been paid off, as a result of the rise of population and income, 
the debt charge per head had fallen by almost 75 per cent. 1 

Anticyclical Debt Policy 

«« 

In view of the ideological position of the administration, it might 

well be expected that the issue of public securities would be ar- 
ranged in such a manner as to embarrass the private economy as 
little as possible. In other words, when there was competition for 
funds, the government would defer to the needs of the private 
economy. The government would do this even when it might help 
moderate a business boom by issuing long-term securities. Actually 
what the government should do is to estimate what would be the 
cost to the Treasury of borrowing money in periods of booms — that 
is, at high rates of interest — above what the cost would be if the 
securities were issued irrespective of the general economic situation. 
Against this the government should make some estimate of what 
the gains would be for the whole economy if the policy of issuing 
securities were anticyclical: that is, a policy that would tend to de- 
flate in periods of inflation and inflate in periods of deflation. But 
the government makes no effort to make such estimates. 

The Treasury had a peculiar view of the problem of issuing 



Failure of debt management 161 

government securities. It was greatly concerned about the state of 
the private financing market. Perhaps this is consistent with the 
general view that the government should not interfere with the 
private economy. But unfortunately the government has inescapable 
responsibilities in this time and age, and therefore the job of the 
Treasury should be to protect the important interests of the nation 
and the Treasury. But apparently Under-Secretary Burgess believed 
that the Treasury had always to yield to the demands of the private 
market. In other words, if there was a great and inflationary demand 
for funds on the part of the private market, the Treasury should 
yield to that pressure and not issue long-term securities which 
would restrain inflationary forces and compete with private demand. 
The needs of the Treasury were to take second place to those of the 
private market. This position was held even though it was generally 
believed that in such periods the correct policy is to absorb excess 
funds and discourage private demands through higher rates. Mr. 
Burgess said: 

Well, sir, the difficulty of selling long-term Government bonds is 
simply that the lenders of money, whose position Mr. Mayo has very 
thoroughly charted, are under enormously heavy pressure for funds. The 
life insurance companies are having offered to them corporate securities, 
mortgages, at very attractive rates; the savings banks are having mort- 
gages offered to them more than they can absorb; savings and loan asso- 
ciations have their resources thoroughly absorbed by the mortgages they 
make. 

There just is not any volume of long-term funds seeking investments, 
and the borrower is seeking the lender, and under those circumstances if 
the Government were to try to sell long-term bonds, you would have to 
offer a competitive rate that would be very high. 

You could not justify offering Governments at a rate so competitive 
that these people would take it instead of the things they are absorbing. 

In fairness, we should quote a later and able Under-Secretary, 
Julian B. Baird, who clearly put the point that Treasury issues should 
be timed to help the economy as well as keep financing costs down. 2 

Money and Debt Management 

The debate in 1950 and 1951 was largely over the question of 
the extent to which the Federal Reserve should manufacture money 
in order to keep the price for government securities up — that is, the 



162 }0L THE ECONOMICS OF THE POLITICAL PARTIES 

rate of interest down. A compromise was reached early in 1951 
which suggested that the Treasury would make stronger attempts to 
issue long-term securities that reflected the rate that the public 
would pay without depressing rates through intervention on the 
part of the Federal Reserve. Under the Eisenhower administration, 
the increasing tendency has been for the Federal Reserve to deter- 
mine monetary policy without any serious regard for the price of 
government securities or the rate of interest. The result has been 
large fluctuations in the price of government securities. 

With a penchant for higher interest rates and a determination 
not to sustain the price of government securities through artificial 
monetary measures, the Federal Reserve tends to induce a desertion 
of the government bond market. With higher interest rates and un- 
availability of credit, the tendency is for financial institutions to dis* 
pose of government securities in order to take care of other cus- 
tomers. 

One of the effects of the higher interest rates is a depression in 
the price of existing bonds. Such increases especially affect the price 
of federal securities. But this apparently did not worry the Federal 
Reserve authorities. 3 

By the terms of the Accord of 1951 the support of the govern- 
ment bond market was to end, and monetary policy was to be de- 
termined on the basis of the general needs of the economy. Un- 
doubtedly, the government bond market had attracted too much 
attention in the determination of policy up to that point. 

The Federal Reserve policies of the 1950's, however, had a some- 
what different result. Instead of supporting the government bond 
market, the authorities in fact encouraged a desertion of the bond 
market by financial institutions. For example, from 1954 to 1957 
financial institutions, under pressure of induced higher rates and 
unavailability of credit, disposed of $14 billion of federal securities. 
Purchases of $15 billion by federal agencies, state and local govern- 
ments, individuals, and so on, required a substantial drop in prices: 
that is, a large rise in rates that increased the annual cost of financ- 
ing the debt by a billion dollars in three years, or about 15 per cent. 

One result of this kind of policy was gyrations in the prices and 
yields of government bonds. With the yield on United States gov- 
ernment bonds falling from 3.73 in October, 1957, to 3.12 in April, 
1958, and then rising to 3.76 by October, 1958, the market was at a 
loss concerning appropriate behavior. 



Failure of debt management 163 

Responsibility for Rates 

Both the Treasury and the Federal Reserve, though they tended 
to influence rates, would generally deny that they had any influence. 
Time and again before the Senate Finance Committee Burgess 
denied that the Treasury had done anything but follow the market 
in setting rates whenever it issued a new security. In fact, even the 
3 a /4 per cent long-term security issued in 1953 at a rate substantially 
above that on long-term securities — even this issue Burgess claimed 
was consistent with the market situation. 4 

In an exchange with Senator Anderson, Secretary Burgess re- 
luctantly admitted that the Treasury had influenced the long-term 
rate. But on many other occasions, both Secretaries Humphrey and 
Burgess and Chairman Martin had insisted that they had merely 
followed the market. 5 

In insisting that the Federal Reserve followed the market, Chair- 
man Martin was virtually abandoning responsibilities of a central 
banking system for leadership. Actually, of course, through its bank 
rate and especially through its control of reserve requirements and 
open-market operations, the Federal Reserve can to a considerable 
extent determine the amount of money available and therefore the 
rate of interest. There have been numerous experiences when the 
Federal Reserve clearly did try to influence the rate of interest and 
the total supply of money, and sometimes with success. We can go 
back to the late 1920's, the great open-market operations in the 
early 1930's, and the making available of billions of dollars of credit 
to finance the government during World War II. 6 

In the fall of 1957, it was quite clear that the Federal Reserve 
actually led the money market in the decline of rates. Many have 
criticized the Federal Reserve for increasing its rates in August, 
1957, when it was already clear to many that the recession was well 
on its way. 7 Chairman Martin's defense of the August increase 8 was 
not impressive. 

. . . Federal Reserve discount rates were raised one-half percentage 
point in August in order to relate them more closely to market rates which 
had been rising for some time and in this way to maintain their effective- 
ness in restraining bank credit and monetary expansion. That action also 
served as an indication to the bysiness and investment community that 
the Federal Reserve rejected the idea that creeping inflation was inevi- 
table. 



164 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

This denial of any influence on the market rate might well be an 
expected view of the general position of the Administration and the 
Federal Reserve. It is not the responsibility of government or its 
agencies to fix prices. Once the Federal Reserve or the Treasury 
admitted that it had some influence on prices or rates of interest, 
then, of course, this would be an admission that the government had 
intervened in the private economy. This is not accepted doctrine. 

Debt Management as a Means of Raising Interest Rates 

In the new Eisenhower administration the man put in charge of 
debt management was Randolph Burgess, a former banker and 
propagandist for a free market and higher rates of interest. He had 
been convinced by literature, and especially by his own works, that 
the first move should be to free the capital market from government 
domination. With an increase in the rate of interest under free 
market conditions he assumed that government securities would 
then gravitate to the public or would be offered at a rate of interest 
adequate to induce them to buy government securities. The banks 
would then correspondingly sell these securities. 

In a press release of April 13, 1953, the Secretary of the Treasury 
announced: "The new issue of 30 year, 3^ per cent bond is one step 
in a program 'of extending part of the debt over longer periods and 
gradually placing greater amounts in the hands of longer-term in- 
vestors.' . . ." 

In 1946 the Committee on Public Debt Policy had been formed, 
and Randolph Burgess, Vice-Chairman of the National City Bank 
of New York, became the chairman of this organization. Most of 
the members of the Committee were high executives of banks and 
insurance companies — organizations, obviously, that would profit 
from higher rates. Numerous other financial organizations also 
pressed for an honest dollar and a free money market, and many 
commented on the large banker and financial interest in the gov- 
ernment. 9 

The introduction of a dear-money policy through the issue of 
government securities at rates above the market rate is quite con- 
sistent with the party's cult of the free market, of the need of re- 
stricting the supply of money, of the importance of stabilizing the 
price level, as well as its opposition to government intervention in 
the capital market. 

Some questions may be raised concerning the wisdom of en- 



Failure of debt management 165 

trusting the control of interest rates to those who sell the commod- 
ity. It is also true that in our system banking policy is largely con- 
trolled by bankers. The former Chairman of the Board of Governors, 
Marriner Eccles, has stated: "He [that is, the Reserve Bank Presi- 
dent] participates in vital policy decisions . . . which affect all 
banking. So far as I know, there is no other major governmental 
power entrusted to a federal agency composed in part of represen- 
tatives of the organizations which are the subject of regulation by 
that agency." 10 Obviously, bankers profit by an increase in interest 
rates. 

Another aspect of this problem should not escape us. In general 
the small saver who buys the E bonds has not been treated as well 
as the large saver. In his statement on "Where Does the Money 
Come from," October 29, 1956, Governor Stevenson wrote: 

Injustices are also evident in government and debt policy. For ex- 
ample, the three month Treasury Bill now yields a return that is 70 per 
cent above the 1952 rate: the 3-5 year bond yields about 60 per cent 
above that rate. The rich investors buy these securities. . . . But the E 
bond, purchased by the small investor, yields no more than in 1952, and 
the yield is but 3 per cent above the war time rate. . . . u 

Short-Term Debt 

Above all, Under-Secretary Burgess was interested in reducing 
the amount of floating — that is, short-term — debt, and reducing the 
securities held by the banks. But he was singularly unsuccessful. 12 
Actually, all he claims is that the loss in average length during his 
regime was considerably less than in earlier years. ( Short-term debt, 
he assumes, has to be renewed too soon and too often and at times 
when funds are scarce. ) 

Secretary Burgess was optimistic about the great improvement 
in the floating debt. I am not sure that his optimism was justified. 13 

Burgess's statistics were rather questionable. He found a decline 
in the floating debt of $4.3 billion. But this is not really correct. 14 
Actually, there had been an increase in the floating debt, though his 
table shows a decline. 

Senator Anderson was quick to see the dubiousness of the sta- 
tistics presented by Mr. Burgess, and Mr. Burgess had to give 
ground. The Senator showed on consistent counting that the short- 
term debt had risen greatly. 15 



166 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

Nor were Secretary Burgess and his successor much more effec- 
tive in reducing the government debt held by commercial banks. 
The theory behind this is, the less the banks hold the more they will 
reduce the total amount of money. Note that in 1945 the commercial 
banks held almost $91 billion. By the end of the Truman adminis- 
tration the amount had been cut to $63 billion, or more than 30 per 
cent. But, at the end of 1958 the total amount was $67 billion, and 
even at the end of 1960 the total was $61 billion. 

The Rate on Government Borrowing 

At the end of the Truman administration, the average cost of the 
national debt was 2.48 per cent. By fiscal 1961 the average is esti- 
mated by the administration at 3.12, an increase in the rate of about 
25 per cent. This is not nearly so significant as the yield on long- 
term bonds of 2.68 per cent at the end of the Truman administration 
and 4.02 per cent in early 1960, or an increase of one half. Even the 
2.68 rate at the end of the Truman administration reflects, in part, 
anticipation of the high money rate policy of the next administration. 

For an administration that presses hard for economy, the in- 
creased cost of the national debt must be a matter of great concern. 
Here there is a conflict between the objectives of the government. 
On the one hand the government is anxious to keep spending down, 
and, therefore, would like to finance this debt with smaller expendi- 
tures. On the other hand, the government also wants a free market 
and restrictive monetary supply, and that means higher money rates. 
In this instance the government yields on the former objective in 
order to achieve the latter. 

It is apparent also that the Eisenhower administration had some 
doubts about its policies. For example, the Under-Secretary of the 
Treasury for monetary affairs, Julian Baird, late in 1958 commented 
on the very rapid rise of credit in general and made it clear that the 
government cannot be relegated to the position of a marginal bor- 
rower, though its borrowing should be subjected to careful scrutiny. 16 

Consultation on Treasury Financing Problems 

One gets the impression from Burgess's testimony that the Treas- 
ury has relied too much on discussions with private business con- 
cerning Treasury financing policy. First, such consultations give the 
bankers some idea of what the federal policy is going to be and 
puts them in a strategic position for profiting from this information. 



Failure of debt management 167 

Second, it is bad policy, for the Treasury tends to depend so much 
upon advice from those who are financially involved. Obviously, 
the Treasury must have some expert advice, though it would be 
better if it relied much more on its own staff. At any rate, there 
ought to be much more advice within the organization from those 
who do not have a direct stake in the results. (The Kennedy Ad- 
ministration has corrected this situation by putting a first-class 
authority on the debt and money market, Robert Roosa, in charge 
of debt operations and relying on advice of 25-30 academic econ- 
omists as well as on financial groups. ) 

Of course, this leaves the Treasury open to severe criticism. 
Senator Kerr took advantage of this situation and showed the pos- 
sibility of insiders making large gains as a result of these consulta- 
tions with the Treasury. 17 

senator kerr: "You do not think those meetings are one-way meet- 
ings, do you, Doctor?" 

mr. burgess: "No, I think we keep them informed of the broad 
national situation as far as we are concerned." 

senator kerr: "Do you think they get as much impression from 
you as you do from them?" 

mr. burgess: "I think they do know certain broad outlines of govern- 
ment policy." 

senator kerr: "They have as much a stake in this as you do." 

The Government Security Market 

In the summer of 1958 a large speculative interest began un- 
loading securities, when it was realized that cheap money was not 
here to stay. The market became so disorderly that the Treasury 
bought back some $600 million of an issue, and the Federal Reserve 
had to abandon its principle and buy another $1.2 billion before 
panicky conditions could be corrected. Thereafter, for the rest of 
the year the Treasury had to depend on the issue of small-term 
government securities. 

In an able speech Congressman Henry Reuss 18 brought out very 
well the failures of the administration policy, given its objectives. 
He showed that on February 2, 1953, the President announced the 
policy of getting rid of excessive amounts of short-term debt, and 
the Secretary of the Treasury commented on the fact that short- 
term debt brings inflation; the Under-Secretary of the Treasury in 
May, 1953, also dwelt fully on the inflationary aspects of short-term 



168 }£&, THE ECONOMICS OF THE POLITICAL PARTIES 

borrowing by the government. The money supply increased by the 
amount of borrowing. In fact, from 1952 to 1958, although personal 
savings on a net annual basis were more than $60 billion, none of 
these savings, either directly or through saving institutions, went 
into the purchase of federal debt. Again in these six years, major 
savings institutions, though their assets increased by $100 billion, re- 
duced their investments in government securities. As a result of 
these desertions, the commercial banks, despite the alleged policy 
of getting securities out of the banks, held a larger portion of debt, 
exclusive of debt in government accounts and securities held by the 
Federal Reserve, than they did in 1952. 

In 1958 the situation was particularly bad. The Treasury had to 
raise $19 billion of new money, $8 billion to finance the deficit and 
$11 billion for former investors demanding cash for maturing and 
redeeming securities. Individual and institutional savers actually 
reduced their holding by $2 billion in 1958. The result was that the 
commercial banks had to finance $8 billion of the entire federal 
deficit, with their holdings of their government securities rising from 
$58 to $66 billion in a year. 



19. The budget and defense 



Excessive Weight on Budgetary Considerations 

In no area has excessive attention to the budget done more dam- 
age than to our defense program. Here perhaps more than anywhere 
else control by businessmen has been costly. The businessman is 
excessively worried about the budget; he tries to apply his rationali- 
zation and cost-reduction procedures in the military field as he does 
in business. But in defense new weapons must be introduced 
quickly; there must be more underlying research; long waits and 
drastic cuts may be dangerous. 

As a candidate, Eisenhower pledged himself to maintain Ameri- 
can military strength. Thus, at Los Angeles on October 10, 1952: 
". . . Only a strong and free America, actually cooperating with the 
free world, can give substance to the hope of a lasting peace. . . . 
We must first bring about a position of strength that will persuade 
the Kremlin that further military aggression anywhere is senseless." 

But this pledge conflicted with the Republican passion for re- 
trenchment. Thus at Baltimore on September 25, 1952, the candi- 
date said: "But the big spending is, of course, the $60 billion we pay 
for national security. Here is where the largest savings can be made. 
. . ." Then he went on to criticize the alleged Truman policy of 
stop-and-start spending, of feast and famine in military expendi- 
tures, the delay in putting up bases in Morocco, and, therefore, in- 
troduction of a costly crash program; the purchase of 20,000 expen- 
sive desk chairs at $10 above the standard model prices and similar 
wastes. 

In the main, the desire for economy triumphed over the desire 
for adequate military forces in the Eisenhower administration. Un- 

169 



170 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

der the influence of Secretary Humphrey, Budget Director Dodge 
and even of Defense Secretary Wilson, the President soon embarked 
on a determined program for reducing military expenditures. 

For a moment, even the President complained of the excessive 
pressure for a cut in the military budget. The President wanted to 
know, in a Cabinet meeting early in his first term, why, if the bal- 
ancing of the budget was so essential, effort was concentrated on 
cutting the military instead of civilian expenditures. By 1959 his 
emphasis had slightly changed. While he rejected the notion that 
the administration "put a balanced budget ahead of national secu- 
rity," he added, "I say that a balanced budget in the long run is a 
vital part of national security. . . . Everybody with any sense 
knows that [if we continue to increase defense spending] we are 
finally going to a garrison state." 1 

One of the most surprising aspects of the large cuts in 1953 was 
that the Chiefs of Staff were not even consulted. Defense Secretary 
Wilson, on May 20, 1953, said: "When I came back [from a NATO 
conference] I found some figures [on a proposed defense cut]. I 
went over them quickly — after we got the things together we added 
them up. Much to [my] surprise . . . most of the cuts somehow 
seemed to show up in the Air Force Program." 

A Budget Bureau letter to Defense Secretary Wilson of May 7, 
1953, advised Wilson that his first Defense Budget did not meet 
"the Administration's . . . budget objectives" and curtly told him 
that he was "expected to adjust [his] recommendations accordingly." 
General Ridgway, who had served as Army Chief of Staff under the 
Eisenhower administration, revealed that the first three Eisenhower 
Defense Budgets "were not primarily based on military needs. They 
were squeezed within the framework of a pre-set arbitrary man- 
power and fiscal limits. . . ." 

The Republican Congress seemed more anxious to cut military 
spending than even the President or his advisors. In 1956, on the 
issue of increasing the Air Force budget, 93 per cent of the Senate 
Democrats were in favor and 88 per cent of the Senate Republicans 
against. 2 

In 1954 Defense Secretary Wilson said: "They provide a level 
of military strength which can be supported by the country. . . . 
Over the long pull economic strength is an indispensable prerequis- 
ite for military strength." This is a typical statement of businessmen 



The budget and defense 171 

in the administration, and even of some generals indoctrinated with 
principles that apply in business but not in government. 

Again, Army Chief of Staff Ridgway told the House Appropria- 
tions Committee in 1954: "The Army has been guided in the prepa- 
ration of this budget by basic economic and strategic decisions 
which have been made at a higher level." 3 

Hanson Baldwin, The New York Times military analyst, said: 
"There is no doubt that reduction of costs was a major factor — 
probably the major factor in the new program." 4 

The Secretary of the Treasury and the Budget Director had more 
influence in shaping the over-all size of the services than did the 
Joint Chiefs of Staff. 5 

Walter Lippmann had this to say early in 1959': 

The fatal error lies in the decision of the President to make the para- 
mount issue of the present time a Federal Budget balanced at the existing 
level of taxes, along with a promise of a reduction of taxes before the next 
Presidential election. We are approaching one of the great climaxes of 
the cold war and the President's decision about the paramountry of the 
budget reflects a failure to understand the nature of the cold war. 6 

Our Insecure Position 

Largely as a result of determination to cut the budget and pro- 
vide tax relief for the American taxpayer, the government put the 
nation in a position of peril. 

Thomas K. Finletter shows very well what happened during 
these years. 

Look at the difference in our whole power position and our security 
between, say, January 1951 and January 1959. In January 1951, no 
nation on earth dared risk general war with the United States . . . 

But in January 1959 we are facing the so-called "missile gap" when 
the Russians will have superiority over us in air-atomics — possibly enough 
of a superiority to allow them to strike first and to accept our counter 
blow . . . 7 

Our security position has certainly deteriorated since 1953. Our 
responsibilities have been large and varied. We have not matched 
these responsibilities with an adequate security position. General 
Ridgway told a Senate Appropriations Hearing in 1954: 8 ". . . 



172 }£& THE ECONOMICS OF THE POLITICAL PARTIES 

You're steadily reducing Army forces — die reduction through which 
our capabilities will be lowered while our responsibilities for meet- 
ing the continuing enemy threats have yet to be correspondingly 
lessened." 9 

In accordance with the Secretary of State's announcement of a 
policy of massive retaliation, one might well have expected an in- 
crease in expenditures for the Air Force, and also a decisive program 
to develop the ICBM, and in general to improve our atomic posi- 
tion. Yet even as the massive-retaliation program was announced, 
the government cut decisively our military expenditures, particu- 
larly those for our Air Force. As we lost position vis-a-vis the Rus- 
sians and the communists generally, we were put in the position of 
being able to fight only an atomic war and being virtually incapable 
of fighting limited war — for our manpower strength was greatly cut. 
Modern war with nuclear warheads upon ballistic rockets of inter- 
continental range raises almost insuperable problems for the United 
States at the present time, especially in view of the large advances 
in recent years by the Russians. 

In a talk before the National Press Club on January 15, 1959, all 
the President could say about our missile program was that we had 
worked hard at it for four years, and other countries had been at it 
much longer. He also said that we should not judge our whole de- 
fense effort by the missile program. After all, we do have planes 
traveling at double the speed of sound. 10 In fairness, we should add 
that in 1961 the CIA does not seem so sure of our missile lag as it 
had been in the late 1950 , s. 

The select Committee on Astronautics and Space Exploration, 
after a thorough survey, could give us very little reassurance. 

Several qualified witnesses report the Committee had estimated the 
Soviet over-all lead over the United States is 12 to 18 months. This esti- 
mate may be overly generous to the United States. . . . 

Budget pressures in the short run should not be the primary basis for 
decisions on space programs which are apparently long range, and which 
involve the very survival of the nation. 11 

Yet the main emphasis was on the budget. At one point, Secre- 
tary Wilson was so disturbed by changes in the demand of the 
President for cutting personnel that he wrote a surprising note to 
the President. "I wonder if you would give me the gist of them 
[proposed cuts] in written form." And in the Herald Tribune, 



The budget and defense 173 

Roscoe Drummond, who could certainly not be accused of anti- 
administration prejudice, wrote: "The only reason given to the 
Pentagon for making the cuts was the desire of the Administration 
to bring the budget more nearly into balance." 12 ( My Italics ) 

Failure of the administration to keep the military chiefs of staff 
informed of their plans, in part the result of the great pressure put 
upon the President by the budget balancers, resulted in much con- 
fusion concerning what the plan of the administration really was. 
Even Hanson Baldwin, the able military writer for The New York 
Times, was puzzled. He said: 

The Dulles talk and the budget request drew together and explained 
the fundamental concepts that underlie the new policy. These, as de- 
veloped by the Eisenhower Administration, include the switch from the 
"crisis year" concept to preparations for the "long haul"; disengagement 
of our ground forces, as far as possible, from the Asiatic mainland; re- 
duction of our fixed overseas commitments; emphasis upon air power 
and sea power; creation of the stronger strategic reserve in this country 
and of a more mobile and flexible strategy; reduction of military costs 
and greater reliance upon atomic weapons as a deterrent to aggression. 13 

Mr. Baldwin then went on to say that the budgetary considera- 
tions were dominant — and also that the "new look" went back to 
former President Hoover and Senator Robert Taft. Baldwin found 
many inconsistencies. 

Military outlays were drastically cut in 1954; and apparently 
research had very little attraction for Mr. Wilson. In February, 1957, 
Wilson expressed preference for applied research and made clear 
his impatience with pure research. 14 

General Ridgway accused Wilson, in effect, "of warning him 
[Ridgway] not to oppose the President's wishes and of forcing a 
'directed verdict' on the joint chiefs in the matter of the size of the 
Armed Forces." 15 

Samuel Huntington, a very able observer, in an unpublished 
paper of 1956 said. 

If either side had an advantage in 1952, it was the United States and 
its allies. In three years, this situation has radically changed. The policies 
of the Eisenhower Administration have eroded American military strength. 
American capability to fight a limited war has been drastically reduced. 
. . . Military effectiveness has been undermined by shortened training, 



174 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

lowered standards, deferred maintenance, and reduced civilian employ- 
ment in the defense department. ... In quantity and quality the Rus- 
sian Air Force is becoming superior to our own. For three years, American 
forces have been cut back, while Russian sea and air forces have been 
steadily expanded. 16 

Information and Debate 

One of the troubles with our defense program is that the admin- 
istration had not been frank with the public. It has avoided dis- 
cussing large public issues. In his introduction to The New America, 
Stevenson wrote as follows : 

One of my keenest disappointments in the 1956 campaign was its 
failure to evoke any real debate of issues. In the climate of opinion which 
then prevailed, it was easy — and politically astute — for my opponents to 
brush them aside. Yet, the illumination of problems, needs and dangers, 
and alternatives for dealing with them are the very purpose of a cam- 
paign, especially for the President. 17 

In a speech referred to earlier, Thomas Finletter also commented 
on the difficulty of getting a discussion of the vital issues. The party 
in power finds it more politically astute to avoid major issues and 
concentrate on mink coats and deep freezes. 

The Defense Department issued a directive in March, 1955, to 
information officers to give out only such information as would 
"constitute a constructive contribution to the primary mission of the 
Defense Department." 

Army Times, October 1, 1955, said: "Claims at maintaining the 
Army strength on these paper units, is a case, in our opinion, of de- 
liberately misinforming the public and is dangerous to the Army and 
the country." 

Roscoe Drummond complained that the Eisenhower administra- 
tion was not giving the American people "either a candid or a full 
explanation of why it is reducing by 400,000 the manpower strength 
of the Armed Forces by June 1956. . . ." 18 

How Much Defense Can We Afford? 

There is no question in my mind that we could afford much more 
than we spent on defense in the years 1953-1960. In fact, the finan- 
cial problem should be of tertiary significance. Should we lose an 
atomic war or should we be so lax in our defense program that we 



The budget and defense 175 

encourage an attack, then the cost will be many, many times that 
of the additional expenditures now required. We must recall that 
we are trying to defend an economy that is worth beyond a trillion 
dollars and that yields a national income of $525 billion. Is it wise 
to jeopardize this wealth and income and, much more important, 
millions of lives, in order to save $5 billion a year on defense? 

I repeat two paragraphs of a letter that I wrote to the Washing- 
ton Post on March 26, 1954: 

From all of this I conclude that the Administration is endangering 
our security by overstressing financial considerations. They are reducing 
our military strength and depending too much on the atomic bomb be- 
cause they believe we face financial disaster if Truman military policies 
are continued. 

In summary, the Administration is being misled by unknowledgeable 
advisors. We have too many Secretaries of the Treasury and too few 
Secretaries of Defense. These false prophets of bankruptcy are "the 
prophets of gloom" because they underestimate our economic strength, 
and by weakening our military position they increase the probability of 
World War III and hence of bankruptcy. 19 

And as early as May 25, 1953, in The New York Times, I wrote as 
follows : 

In short, even the President is too concerned over solvency, with 
resultant policies of inadequate defense and aid. . . . The Republican 
members of Congress, in urging further cuts in security outlays inclusive 
of foreign aid, are bringing us closer to disaster. They should be reminded 
again that solvency is a relevant issue only in a capitalistic society; and 
the incitement to aggression through an inadequate military establish- 
ment and non-cooperation of allies will destroy capitalism and dispose of 
the solvency issue. 20 

In a careful study in 1953 the National Planning Association 
concluded that additional defense spending of $10 billion by 1956 
"would not interfere with further business expansion and would 
not prevent . . . continuing increase in the standard of living." 21 

The famous Gaither Report of 1957 recommended "a rapidly 
rising military budget through 1970, reaching in the years 1960 and 
1961 a peak outlay of about $8 billion a year additional expenditures 
over and above the current $38 billion defense outlay. Another $5 
billion a year for several years, for a civilian shelter program is 
recommended on a second priority basis." 22 



176 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

A careful statement of the CED goes as follows: "We see no 
need to be apprehensive about whether or not the American econ- 
omy can stand the strain of this or even a considerably larger bud- 
get. The risk that defense spending of from 10 to 15 per cent of the 
gross national product, or if necessary even more, will ruin the 
American way of life is slight indeed. . . ." 23 

Conclusion 

Ever since 1939 — even earlier — the Republicans have tended to 
object to substantial expenditures on defense. During the Eisen- 
hower administration the Republicans in Congress were even ahead 
of the administration in proposing severe cuts in our security pro- 
gram. 

In his speech before the American Legion in Los Angeles, Cali- 
fornia, on September 5, 1956, Governor Stevenson said: 

While the Republicans say that we cannot afford the balanced defense 
establishment which is proposed, I would say that we cannot afford an 
unbalanced defense establishment. I insist that the richest and most 
productive country in the world can adequately defend itself against the 
threats posed by a country with a third of our productive power. 

In short, we must not allow the priority of budgetary considera- 
tions over our survival. Here top businessmen have done the worst 
possible job by applying business-as-usual principles to our security. 
They have been too cautious, too alert to the problem of cutting 
costs, and, therefore, have ended by postponing adequate security 
measures. We have had too many Secretaries of the Treasury and 
too few Secretaries of Defense. Ever since 1951 we have steadily 
lost ground vis-a-vis the Russians: in the scientific developments, 
in the quantity and the quality of armaments, in atomic power and 
in the battle for space. 

We have reached a point where we may balance our budget; 
but we are also approaching a point where the growing Russian 
margin of superiority might provide an umbrella of strength under 
which Soviet diplomatic and political pressure could have its way 
throughout the world. 

It is of some interest that in recent years the Russians, with about 
40 per cent of our gross national product, could spend 80 per cent 
as much as this country on defense. The yield in military strength, 
given costs, would be much greater in the Soviet Union. 24 



The budget and defense 177 

In his First-Hand Report, Sherman Adams made it abundantly 
clear that economic considerations were overly emphasized in the 
determination of security policies. At the very outset the President 
had invited the Director of the Budget and the Secretary of the 
Treasury to meetings of the National Security Council in order to 
watch over costs : 

. . . George Humphrey was correctly reported at that time to be 
standing guard over the public purse and opposing programs [military] 
on the ground that their proponents failed to make a convincing case for 
them. . . . 

In 1953. Adams reminds us Eisenhower had said: ". . . to amass 
military power without regard to our economic capacity would be 
to defend ourselves against one kind of disaster by inviting another." 

Eisenhower repeated over and over again ". . . his deep con- 
viction that economic strength cannot be sacrificed for military 
strength." 

Yet the differences between the "spenders" and "economizers" in 
the security field janged from $2 to $5 billion a year. Who could 
candidly say that spending $2-$5 billion out of a $400-$500 billion 
gross national product (and in part out of unemployed resources 
and therefore, to that extent, not a net cost) would wreck our econ- 
omy? In the struggle over massive retaliation and dependence al- 
most exclusively on nuclear weapons, in the debates over missile 
programs, and in the reduction of ground troops, the economic con- 
siderations were greatly overstressed. 25 



20. Kennedy on fiscal policy 



^t In Chapters 15 and 18 we concentrated largely on Eisenhower's 
views and policies on taxation, spending and debt management. The 
general conclusion is that too much stress was put on balancing the 
budget, repaying debt, the harmful effects of deficit financing, on 
showing a balanced budget even when the underlying conditions 
reflected an unbalanced budget. 

Nixon s Views on Spending 

In the 1960 campaign, one of Nixon's favorite themes was the 
penchant of the Democrats for spending. To be labeled a spender 
carries considerable political liability. Nixon said: "We find lavish 
spending pledged for present programs, plus a host of costly new 
programs, all sworn to be accomplished without refueling inflation 
or raising taxes." x 

Of the three opposition Congresses, Nixon complained that they 
had contributed net $27 billion of additional costs in six years. 2 

Again: 

He'll [Kennedy] spend about $15 billion more of your money a year 
than I will, but you know what that means. . . . Your taxes and prices 
will have to go up. . . . 3 

The only answer to this problem is to spend more money. 

But though Nixon admits that we have to spend more on health, 
defense and medical care, he adds that Democratic expenditures 
will rob the people of their pensions and savings. 4 

It is the poor who pay these $15 billion, according to Nixon. "If 
all personal taxable income in excess of $10,000 were taxed 100 
178 



Kennedy on fiscal policy 179 

per cent, the additional revenue would be only $5.6 billion. . . ." 5 

In his first major speech after the election of 1960, Nixon again 
hit hard at the spending virus. The Democrats, in his view, by 
May, 1961, had already proposed $15 billion additional in spending 
and obligations, and only one third went for defense. 6 

Eisenhower also, in his first major speech, since the election at- 
tacked the Democrats for visiting upon "voteless youngsters a moun- 
tain of unpaid bills." Even deficit financing in the short run was 
inflationary — "... I often think how easy it is to buy things when 
you're spending the other fellow's money." 7 

In a final comment Budget Administrator Maurice Stans com- 
mented on how little good spending to get out of a depression really 
did. 8 Yet one might raise the question of where the election would 
have gone had the Budget Director and the President been a little 
more receptive to modern fiscal theories. A turnabout from large 
deficits to substantial surpluses, estimated by various experts at 
$15-24 billion in the period 1958-1960 was undoubtedly the major 
factor in bringing about the abortive end of prosperity and the 
oncoming of a recession in 1960. A rise of unemployment of a mil- 
lion workers from the spring to October, 1960, and in addition the 
loss of jobs related to declining members of the labor market as 
business conditions deteriorated — these could easily explain the 
loss of the election by 100,000 votes. The Democrats won by 5,000 
votes in Illinois (27 electoral votes), by 21,000 in New Jersey (16 
electoral votes), by 65,000 in Michigan (20 electoral votes), by 
26,000 in Minnesota (11 electoral votes), by 35,000 in Missouri 
( 13 electoral votes ) , by 9,000 in South Carolina ( 8 electoral votes ) . 
All of these states might easily have gone for Nixon if V/ 2 million 
more jobs were had just before the election. The results then would 
have been 298 electoral votes for Nixon and 225 for Kennedy. ( See 
Chapter 8. ) 

Each job lost means at least two voters discontented, and it 
would require a shift of only a small percentage of the (say) 3 
million disaffected by losses of jobs to account for Kennedy's victory. 
In fact a reversal of 5,000 votes in Illinois (y 10 of 1 per cent of the 
votes) and 21,000 in New Jersey (less than 1 per cent) would have 
given the election to Nixon. The large unemployment in Michigan 
might greatly have been reduced and easily have shifted the state 
to Nixon. 



180 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Kennedys Views 

Even while he was a Senator, Kennedy revealed a vulnerability 
to modern fiscal views much greater than among Republican policy 
makers. In the campaign he amplified his views. His major revela- 
tion was in an address to the Associated Publications Conference 
on October 12, 1960. 

And both candidates are equally opposed to excessive, unjustified 
or unnecessary government intervention in the economy — to needlessly 
[my italics] unbalanced budgets and centralized government. . . . The 
budget should ordinarily be balanced except in periods of threat to our 
national security and serious unemployment. 

Criticizing excessive recourse to dear money, Kennedy would have 
a "flexible, balanced, and above all, coordinated monetary and fiscal 
policy." 9 

On numerous occasions Kennedy emphasized the need of a 
sound fiscal policy and a balanced budget. Yet he would use mone- 
tary and fiscal policy to stimulate the economy. But the general 
thrust of Kennedy's campaign views on fiscal policy was much 
more advanced than the Eisenhower-Nixon approach, though the 
latter on occasion seemed more sensitive to new ideas than Eisen- 
hower. Kennedy's views are especially interesting in that on one 
occasion he wanted to know what were the costs of nonspending by 
the Republican administration — in higher costs of construction as a 
result of delays; in the rise of delinquency associated with slums 
not treated; in the costs of a flood because dams were not built. 

In a statement to Executive, of October, 1960, Kennedy stated 
well the elements of modern fiscal theory. 

. . . When business and employment are declining, the government 
may wisely preserve, and even step up, its needed expenditure programs. 
When overall dollar demand rises, creating inflationary pressures, the 
budget should be vigorously balanced, or even overbalanced, so as to yield 
a surplus. 

By espousing a capital budget, Kennedy marked a great advance. 

We shall develop more business-like budget practices for the natu- 
ral resources development, practices which distinguish between capital 
investment and operating expenditures, instead of a system which treats 



Kennedy on fiscal policy 181 

capital invested in a wholly self-liquidating power project, the same as 
an expenditure which cannot ever be recovered. . . . 10 

Many economists who adhere to New Deal and modern fiscal 
approaches have been critical of President Kennedy for not spending 
more freely. The Council of Economic Advisors clearly would like 
to see the President rely more on deficit spending. Business Week 
comments on the impatience of Chairman Heller of C.E.A., Paul 
Samuelson and other liberal economists as well as some conservative 
economists like Herbert Stein of C.E.D. 11 But the President is sensi- 
tive to the charge of fiscal irresponsibility. He is fearful that large 
deficits will jeopardize his program before Congress, and prove to 
be a political liability. 

I am inclined to the view that a larger deficit could be tolerated 
and the effects would be good. But I write as an economist, not as 
a political economist. The President has to make the decision of how 
far he should go along with the economists who push the Keynesian 
approach. This is a political as well as an economic problem. 

Even continuous deficits, year after year, are not necessarily 
harmful and in fact may be helpful. In the postwar period we 
experienced one bad year and two good ones in each three-year 
period. The 1958-1959 deficit of $12 billion, though it was not 
timed perfectly, did get us out of the 1957-1958 recession. Is there 
any great danger involved in adding a $12 billion deficit each three 
years, or $4 billion per year? The cost would be about $150 million 
per year or less than 1 per cent of the expected annual gain of GNP. 

It is a great improvement when the top policy maker recognizes 
that the budget need not be balanced eacl^L year. So far the President 
has gone, and this is an advance over the general position taken in 
the eight Republican years. But once the economists educate the | 
public adequately, we can move on to a more advanced position, 
namely that just as the incurrence of debt in due proportions helps 
and does not hurt business, so a rising federal debt, the costs of 
which and even the rise of which does not increase nearly as much 
as the expected annual gain of GNP over the years, should improve, 
not destroy the economy. 

Kennedy has at least reached second base. The liberal critics 
expect too much. They tend to underestimate the political obstacles 
to putting into effect modern fiscal theory. In accepting a $4 billion 
deficit for F.Y. 1961 ( in part the responsibility of the last administra- 



182 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

tion) and a 7+ billion deficit for 1962 (Eisenhower presented a 
balanced [?] budget for F.Y. 1962), Kennedy deserves much praise. 
But the unemployment problem requires a larger stimulus. A $10 
billion deficit in F.Y. 1962 is a requirement according to most 
economists and possibly a moderate deficit in F.Y. 1963. 12 The 
political and institutional aspects of the size of the deficit is a matter 
of judgment for that astute politician, the President. 

The Administration on Fiscal Policy 

On the whole the advisors of the President tended to lead Presi- 
dent Kennedy in the acceptance of modern fiscal theory. President 
Eisenhower's tendency to move backward rather than forward in 
the last few years in part accounted for the inclination for Dem- 
ocratic advisors to move to the left on these issues. Even in his 1962 
Budget, released in January, 1961, in the midst of a recession that 
President Eisenhower was clearly aware of, he unrealistically dis- 
cussed a balanced budget and rising incomes for 1961, but said 
nothing about using deficits for stabilizing the economy; and his 
last Council Report boasted of surpluses in the midst of a recession 
and again was silent on budgetary contributions to improving the 
economic situation. 13 

Views of President Kennedy's advisors were first presented in 
the Task Force on the Economy which reported to the President 
on January 6, 1961. (Two future members of the Council were 
members of this group.) This committee brought to the attention 
of the President-elect the following: 

1. Aside from the current recession, the economy was tired and 
sluggish. 

2. "The first years of such a decade, characterized as they are 
by stubborn unemployment and excess capacity and following on 
a period of disappointing slackness, are more appropriate periods 
for programs of economic stimulation by well-thought-out fiscal 
policy." 

3. The potential GNP of $550 billion exceeds the current GNP 
by $50 billion. (The Economic Council was later to develop this 
theme, accounting for the gap primarily by excess unemployment, 
the unfavorable effect of recessions on numbers seeking work, on 
numbers of hours of work per week and on productivity. ) 14 



Kennedy on fiscal policy 183 

4. In part because of the dollar problem the balance between 
monetary and fiscal policies will have to be shifted in favor of fiscal 
policy. 

5. Yet the report warned against excessive activism in the same 
sense that a doctor may oversubscribe a dose of penicillin. 

6. Expenditure programs desired for their own sake should be 
pushed hard. The usual argument that these may come where they 
are likely to bring inflation carries less weight than usual in a period 
of large excess capacity. In other words, a stimulus is likely to be 
needed even two years from early 1961. 

7. A temporary tax reduction should be held in reserve if the 
proposed spending measures and easing of monetary policy prove 
inadequate. 

Nor was the Task-Force on the Economy alone in pushing for 
a more vigorous fiscal policy. Impressed by the slackness in the 
economy evident in a $50 billion gap in GNP, the recession and the 
slow rate of growth, the Council also urged a more effective use 
of monetary policy, stimulation of housing and a rise of government 
spending. Should the programs prove inadequate they would de- 
pend further on increased government construction and tax reduc- 
tions. 15 

One would expect the prodding of the President by the Council. 
This is a nonoperating and advisory group. Its task is to urge eco- 
nomic views on the President that are consistent with high levels of 
employment and a stable economy. The Bureau of the Budget, in a 
sense also an advisory group, is generally less attracted by advanced 
views, for its responsibility, given the objectives of the government, 
is primarily to help keep spending down. Directors of the Budget 
tend, with the cooperation of the Treasury, to be a restrictive influ- 
ence on government activities. Never was this more true than under 
Eisenhower. 

But the Kennedy Director of the Budget, David Bell, in his first 
appearance before the Joint Economic Committee, abandoned the 
usual posture of budget directors. To some extent he followed the 
President's "Message on Budget and Fiscal Policy/' 

Federal revenues and expenditures must be adequate to finance 
essential needs. "We can afford to do what must be done ... up 
to the limit of our economic capacity. Federal revenues should be in 
deficit in recessions and in surplus in prosperity. Federal programs 



184 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

should contribute to economic growth and maximum employment. 
Each program will be evaluated in terms of our national needs and 
prosperity." 1G 

The Budget Director pointed out that Eisenhower's budget 
studies had revealed that under existing laws and programs, annual 
federal budget expenditures would probably rise by $15-20 billion 
in the 1960's and Annual Trust Fund outlays by another $10-15 
billion. This did not trouble Bell, for he pointed out that even with 
a modest 3y 2 per cent annual growth, our GNP would rise to more 
than $750 billion, and tax receipts from $78 billion in F.Y. 1960 to 
$120 billion in F.Y. 1970. 17 

In his statement Bell stressed the need of larger expenditures, the 
wisdom of contracyclical spending policies ( and also the limitations 
of this approach when spending must be decided primarily on other 
grounds), the tethering of tax policy to economic conditions and 
the limitation of automatic stabilizers ( for example, rising taxes with 
increasing incomes, and declining receipts with the advance of 
recession). The automatic stabilizer in a depression at best can 
only offset part of the loss of income in a decline. Hence new meas- 
ures are also required. The Council had already made a point that 
even the automatic stabilizers on the rise, usually supported by 
economists, can be a nuisance, for the developing economy can be 
stunted by the rise of tax receipts. 

Of a Secretary of the Treasury one does not generally expect 
anything but conservatism. The Secretary, dealing with the finan- 
cial interests and with a major responsibility for safeguarding the 
dollar, is proverbially bound to traditional methods. Besides, it is 
his task to raise the revenue required to meet the bills. Alexander 
Hamilton was indeed an unusual type of Secretary who broadly 
defended the general welfare. But he was an exception to the rule. 
Even under Roosevelt, Mr. Morgenthau seemed as concerned over 
deficits as Hoover. And the views of Secretaries Humphrey and 
Anderson are well known. 18 

All the more striking is the testimony of Secretary Dillon. For 
the first time in the twentieth century a Secretary of the Treasury 
defended a deficit as a necessary weapon for treating a recession. 

. . . Since this deficit [$3 billion in F.Y. 1961] contributed sub- 
stantially to halting the recession, it was entirely appropriate in the 
circumstances. 

The alternative — of reducing government expenditures to match re- 



Kennedy on fiscal policy 185 

duced revenues — would not only have meant no temporary unemploy- 
ment compensation, but also a substantial addition to the unemployment 
rolls as Government programs were curtailed. . . . 19 

In fact, before the Joint Economic Committee on March 7, 1961, 
Dillon had already presented similar views. Indeed he raised the 
question of limiting government intervention. But he pleaded for 
greater use of fiscal policy, and an unbalanced budget in periods of 
recession.- Undoubtedly the Secretary was not prepared to move as 
far or as fast as the Council of Economic Advisors. This is to be 
expected of an operating agency that is more likely to be sensitive 
to Congressional and political attitudes than an advisory group. 

Treasury views are likely to carry much weight with the Presi- 
dent. As the Treasury is an operating agency required to support 
legislation in the Congress and administer, the President is under 
some pressure to accept the views of the Secretary. This does not 
mean that the President may not lead the Treasury; but it does 
mean that in a conflict of views among advisors, the President is 
more likely to listen to the views of the Treasury on issues over 
which the Treasury has the major responsibilities than, say, to the 
Council of Economic Advisors. 

The Policies of the Kennedy Administration 

The President has then received advice to push ahead on fiscal 
policy, though the degree recommended has varied. Not alone the 
Council, but also many of the New Deal economists, such as Key- 
serling and Oscar Gass, have been critical of the President's slow 
pace. Mr. Leon Keyserling, for example, criticizes the administration 
for speaking eloquently but failing to propose a program that would 
bring unemployment down to a minimum level. Keyserling would 
lift federal spending by more than $7% billion in calendar 1961 
and another $6 billion in calendar 1962. His estimate of Kennedy's 
programs is that expenditures will rise by only about one half of 
Keyserling's proposals; and in addition Keyserling would reduce 
taxes. 21 

Mr. Walter Lippmann is also critical of the Kennedy program, 
and seems to be in support of the Council position. On March 30, 
1961, Lippmann wrote: 

The President has felt that for the present he must follow the Eisen- 
hower economic ideology which was the fiscal orthodoxy of the age before 
the Great Depression. Yet his principal advisors are, so far as I know, 



186 ^1 THE ECONOMICS OF THE POLITICAL PARTIES 

unanimous in the belief that a very considerable departure from the 
Eisenhower ideology is necessary if the American economy is to meet 
the needs of the Sixties. . . . 22 

In a nation-wide television program in June, 1961, Lippmann 
could only say that the Kennedy administration was "like the Eisen- 
hower administration 30 years younger. . . . He's been — not mov- 
ing in a new direction but changing the direction in which he is 
going to move. . . . He has not explained about his economic 
challenges, and what it's going to require in the way of much 
stronger measures of — in regard to tax reduction — probably gov- 
ernment spending and credit action. . . ." 23 

The vast majority of economists are essentially right when they 
urge the President to increase the government's contribution as a 
means of reducing the gap of GNP, treating the recession and stimu-* 
lating growth. The more than $600 billion of GNP required by mid- 
dle 1963 as a condition for getting unemployment down to around 4 
per cent is not likely to be reached unless the government's policy 
is greatly strengthened. The Berlin crises, however, substantially 
increase the government contribution. 

That private investment in early 1963 is likely to fall short of 
the $100 billion required points all the more to government activism, 
as does the large rise of consumer debt in recent years vis-a-vis GNP 
in the 1950's, a depressive factor in the sixties. 

Furthermore, as economic conditions improve, federal surpluses 
emerge long before full employment is reached. Hence unless the 
early emergence of a surplus is to be allowed to end the recovery 
prematurely, the government must cut tax rates, and/or increase 
public expenditures and/or repay debt. It is hoped that the repay- 
ment of debt would divert funds to private investment. The last 
seems to me a rather dubious procedure, for in the early periods 
of recovery the resultant rise of investment is likely to be disap- 
pointing, and in the later stages inflationary — that is, unless the 
monetary authority takes corrective action. 

On grounds of economic theory there is no question but that 
Lippmann, Heller, Keyserling and certain others are essentially cor- 
rect. The President has been exposed to these views sufficiently so 
that one is safe in concluding that the President, highly intelligent, 
is also convinced of the validity of these views. His failure to act 
accordingly stems from some doubts of the political wisdom of 



Kennedy on fiscal policy 187 

pushing programs incorporating these ideas too fast. Indeed, Lipp- 
mann may be right that Kennedy's failure lies in not educating 
the public in modern fiscal theory. But this is not easy. The world 
has probably never experienced a more articulate and persuasive 
social scientist than Keynes, the father of modern fiscal theory. 
Yet he had no end of trouble convincing the bankers and the media 
of communication. In the last generation literally thousands of 
economists have been disseminating Keynesian economics, and with 
only moderate success. Yet these disseminators have included such 
outstanding economists and persuaders as Harrod, Hansen, Samuel- 
son (a few hundred thousand students each year receive the ele- 
ments of Keynesian economics from Samuelson's famous text), 
Galbraith, Keyserling and Stuart Chase. The blame for the lag in 
the education of the public is not rightfully put on Kennedy's 
shoulders. 

One of the outstanding economists in Washington, when ques- 
tioned about Kennedy's programs, replied, "What do you expect, 
this is the third Eisenhower administration." This is unfair to 
Kennedy. Indeed the President has a great concern lest he be 
accused of "fiscal irresponsibility." He is fearful of large deficits 
because the country is fearful of large deficits. In the 1930's Roose- 
velt was equally cautious about large deficits. After a long talk with 
Roosevelt, Keynes referred to him as an economic illiterate. But 
Roosevelt had not had the schooling that Kennedy has had. In 
1933 the economists were still largely unconvinced. Yet Roosevelt's 
deficits in the fiscal years 1934-1939 amounted to an average of 
about $3 billion, or 3.7 per cent of GNP. At present GNP the corre- 
sponding deficits would be about $20 billion per year. Some ( includ- 
ing Senators Proxmire and Goldwater) have claimed that deficit 
financing in the 1930's had proved ineffective. This is not a sus- 
tainable position. In fact GNP rose from $56 billion in 1933 to $91 
billion in 1939, unemployment declined by 3 million from the peak, 
and the total number of jobs rose by 4y 4 million. 

Kennedy's fear of the political repercussions, inclusive of dam- 
age to his program, of what is generally known as fiscal responsi- 
bility, is reflected in his program. Like Eisenhower, he tended to 
stress programs that would not be reflected in growing deficits. 
He therefore anticipated expenditures, for example, defense con- 
tracts, life insurance payments; relied heavily on expenditures from 



188 ^1 THE ECONOMICS OF THE POLITICAL PARTIES 

trust funds, such as emergency unemployment compensation, accel- 
eration of highway outlays, liberalization of O.A.S.D. insurance and 
a health program for the old under O.A.S.D. insurance. 

If this were all that the President proposed, the charge of a 
continuation of Eisenhower policies would be justified. But he went 
both in theory and practice far beyond the Eisenhower position. 
He accepted the unbalanced budget idea. He proposed and fought 
for vigorous educational programs, for schools and colleges; for a 
defense and space program less hampered by limitations of finance; 
for a housing program that went far beyond any that the Eisen- 
hower administration would accept; and also the Area Development 
program. 

Indeed Kennedy has been cautious. In his May 25, 1961, mes- 
sage to Congress, for example, he said: "If the budget deficit . . . 
is to be held within manageable proportions, it will be necessary to 
hold tightly to prudent fiscal standards, and I request the coopera- 
tion of the Congress in this regard — to refrain from adding funds 
on programs, desirable as they may be, to the budget. . . . Our 
security and progress cannot be cheaply purchased; and their price 
must be found in what we will forego as well as what we all must 
pay. - 4 

But the degree of advance over Eisenhower policies is large 
enough to justify the claim of a change in direction, not merely a 
repeat of the Eisenhower program. In one year the advance has 
been substantial. Another year of education and the continuance of 
6-7 per cent of unemployment are likely to bring more audacious 
policies. The additional outlays of the administration for fiscal year 

1962 are likely to be of the order of $8 billion, not the $15 billion 
that Nixon charged Kennedy with in the campaign. A $10 billion 
deficit in F.Y. 1962 would contribute much, a $15 billion deficit 
would be excessive and extravagant. The real test will come in the 

1963 Budget which will indeed be Kennedy's first budget. 

In appraising Kennedy's program one should take into account 
the relative emphases put upon antirecessionary policies and 
long-run growth, both sustaining and stimulating. 125 In part the 
lack of sympathy with a vigorous antirecession policy relates to 
the President's confidence that recovery was well on its way by the 
second quarter of 1961. But substantial outlays for education, hous- 
ing, and area development are primed to stimulate long-term 
growth. With productivity rising 2Vi per cent per year (average) 



Kennedy on fiscal policy 189 

and the rise of the labor force by a million or more, an annual in- 
crease of GNP of about $20 billion is required in order to keep 
unemployment from rising. It is not clear now that current policies 
will assure even the $20 billion annual rise required to keep unem- 
ployment at 6-7 per cent, and certainly not enough to reduce un- 
employment to 4 per cent. 

In 1961, a large deficit may well have serious political repercus- 
sions for the President; and in part because the Democrats are 
held to be the spenders. But political liabilities of even larger pro- 
portions can accrue to the Democrats if they are held responsible 
for 4-5 million, or 6-7 per cent unemployment. In 1961 the Demo- 
crats can blame the Republicans for the unemployment. But in 
1962 they will bear the brunt of criticism if unemployment re- 
mains high or increases. Then the political liabilities will fall on the 
Democrats unless they take decisive measures to reduce unemploy- 
ment. 

What is done to treat a recession depends in part upon the 
estimate of the decline. On September 29, 1960, Secretary of the 
Treasury Anderson presented an optimistic view of the economy in 
a speech to the I.M.F.*: the inflation problem had been licked and 
employment was up. That we had been suffering from declines in 
the economy for several months was evident to the financial writers 
of The New York Times and Business Week, but not to the Secretary 
of the Treasury. 26 Even in January, 1961, President Eisenhower was 
silent on the recession and its treatment. 

Special Aspects of Fiscal Policy 

1. The budget, an engine for economic gains or an accounting 
device? In the treatment of the Eisenhower period I stressed the 
tendency to overemphasize the appearance of the budget against 
its true state. The tendency has been to dispose of capital assets, 
for example, CCC (Commodity Credit Corporation) paper even 
if in the long run costly to the administration, so long as the immedi- 
ate effects are an improvement in the budgetary appearance. 

A good example of the interest in budget appearances at the 
expense of reality was the administration proposal in 1959 to ex- 
change $335 million of primarily 4 per cent mortgage paper for an 
equal amount of 2% per cent Treasury bonds. The stated purpose 
was to permit receipts of the FNMA (Federal National Mortgage 

* International Monetary Fund. 



190 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

Association) to equal expenditures and thus have no impact on the 
budget. Senator Clark complained that the 2% per cent bondholders 
were being baled out and the government was losing revenue in 
giving up a 4 per cent investment for a 2% per cent one. "We have 
not truly balanced the budget when we do so only by exchanging 
the Government's assets for securities of less value and marketa- 
bility. [A sound system] is not a system which seduces the Gov- 
ernment into undertaking undesirable transactions in order to make 
the books look better. . . ." 27 

The excessive recourse to trust funds, excluded from the budget, 
is another example of the worship of accounting objectives. In this 
connection the following statistics are of some interest. Note the 
tremendous relative rise of cash payments vis-a-vis budgetary ex- 
penditures from F.Y. 1952 to 1961 as compared to 1948 to 1953. 

$ Billion 



Fiscal Year 
1948 
1953 
1961 
Source: Economic Report of the President. January, 1961, pp. 166, 168. 

In part these relative increases in cash payments result from 
earlier legislation. But they are largely the result of Eisenhower's 
penchant for outlays that are not registered in the budget. Even 
the support of liberalization of programs under O.A.S.D. insurance 
by the Eisenhower administration is related to the determination 
to show a sound budget. 

In some respects the Kennedy administration seems to be fol- 
I lowing in the footsteps of the Eisenhower administration. In 1961 
also there is an emphasis on trust fund expenditures and accelera- 
tion of outlays rather than genuine increases. In 1959-1960 the 
Eisenhower administration tried to weight down the 1960 fiscal 
year with heavy expenditures in order to assure a balanced budget 
in F.Y. 1961. The Kennedy administration in allocating outlays of 
the Emergency Unemployment Compensation Act seemed to favor 
somewhat the 1961 budget, the Eisenhower responsibility (that is, 
allocate more than appropriate outlays to 1960-1961), possibly in 



Federal 


Federal 




Budgetary 


Cash 


Excess 


Payments 


Payments 


Cash 


33.0 


36.5 


3.5 


74.1 


76.8 


2.7 


78.9 


97.9 


19.0 



Kennedy on fiscal policy 191 

order to show a better position in F.Y. 1962, for which the Kennedy 
administration would be held responsible. 

But so far the Kennedy record is much better than that of 
Eisenhower. There is little evidence of dubious accounting, of 
sacrificing long-run gains for immediate improvements in the ap- 
pearance of the budget, and what is more, the administration is 
disposed to sacrifice budgetary appearances to improve the economy 
— for example, the pressure put on the Housing Administration by 
the administration not to sell mortgages to private accounts. Such 
sales yield a better looking budget, but they also tend to raise inter- 
est rates just when the government is trying to depress them. 

In one respect the Kennedy administration's policy is remindful 
of Eisenhower's policies : in the medical program for the aged. Here 
one would expect the Eisenhower administration to espouse the 
Kennedy program, for the burden on the general taxpayer is greatly 
reduced under the Kennedy program. But apparently the pressure 
of the AMA and fear of national health insurance were too much for 
the Eisenhower administration and they therefore supported a pro- 
gram that would indeed be costly to the budget and the general 
taxpayer. 

In his first Budget message to the Congress, March 24, 1961, the 
President raised some questions concerning the January restate- 
ment of the 1961 Budget by Eisenhower. President Eisenhower had 
unrealistically assumed that $150 million would be available from 
a rise of postal rates to take effect by April 1, 1961; optimistically 
estimated fiscal 1961 revenues; substantially underestimated the 
normal flow of defense expenditures under then existing policies 
and commitments by at least $500 million; underestimated funds 
required to pay unemployment benefits to ex-servicemen and federal 
employees, to meet the demand for authorized housing loans, and 
to fulfill existing commitments of the Export-Import Bank. These 
facts, plus proposed antirecession measures by Kennedy, account 
for a $2 billion deficit for F.Y. 1961. (The actual deficit was larger.) 

Of the F.Y. 1962 budget the President said, ". . . In short, new 
defense recommendations aside, should there be a deficit in 1962, 
it will be the consequence of the over-estimation of revenues and 
under-estimation of expenditures in the January budget, and not 
the result of new policies or programs proposed by this Administra- 
tion/' 

Kennedy showed that the 1962 budget overestimated revenue 



192 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

and omitted from consideration outlays for many programs for 
which the administration was committed. Moreover, the budget was 
based on policies not acceptable to Congress — for example, mini- 
mum support prices for farm products, severe cutbacks in housing 
programs. For education, though, substantial programs were as- 
sumed and the unorthodox financing was to be on a long-term basis, 
with very small outlays currently.- 8 The budget would be spared 
the burden of education in 1962, but would be more heavily in- 
volved in later years. 

Back-Door Financing ( B.D.F. ) is another problem that requires 
brief mention here. In a narrow sense what is meant by B.D.F. is 
expenditures financed through funds obtained by Treasury borrow- 
ings, not through funds appropriated by Congressional Commit- 
tees. The Appropriation Committees also lose control to some ex- 
tent in other instances : permanent appropriating, contract authority, 
matching state and local grants. The vogue of B.D.F. stems from 
the tyranny exercised by some appropriation subcommittees, and 
from the need of long-term commitments that do not easily fit into 
appropriation procedure. Secretary Dillon has pointed out that 
programs of more than 20 agencies are financed by B.D.F. The 
RFC first had recourse to B.D.F. under Hoover in 1932. The Treas- 
ury by 1957 had advanced $26.6 billion to the RFC and had received 
$13.6 billion in repayment. By mid-1959 B.D.F. accounted for 
Treasury advances of $107.8 billion and repayments of $58.6 bil- 
lion. Both parties have embraced this approach and in the Kennedy 
administration the issues arose in 1961 in re the five-year lending 
program in the Act for International Development and the loans 
under the Area Development Program. 29 

2. Debt problems. On the whole, the Eisenhower administration's 
debt policies paid excessive attention to the minimization of interest 
costs — except in that the high money rate policy tended to increase 
costs greatly. But generally the administration tried to borrow long- 
term when rates were low. Under-Secretary Baird, in a paper quoted 
earlier, in 1960 presented a much more sensible view on these issues. 
It is of some interest, however, that Senator Douglas in general also 
urges borrowing at the lowest rates; and Warren Smith, in an able 
paper for the Joint Economic Committee, also proposed borrowing 



Kennedy on fiscal policy 193 

at the minimum rates — that is, when rates are low, for example, 
in a recession, when the government should borrow long-term. He 
takes this position, however, on the assumption that the Monetary 
Authority will provide the appropriate easing, considering the hard- 
ening effects of the proposed debt policy. But this assumes capacity 
and willingness of the Monetary Authority which, at least in recent 
years, have not been apparent. 30 

The Kennedy administration has shown no disposition to follow 
the Eisenhower policies. In 1961, for example, the recourse to long- 
term issues was modest indeed: there was no enthusiasm for damp- 
ing the recovery by sales of long-term federal issues, and resultant 
higher rates. In contrast the major increases of long-term securities 
under Eisenhower occurred in the recessions and early recovery in 
1953-1954 and 1957-1958. And, despite its determination to extend 
the maturity of the debt, the Eisenhower administration in seven 
years sold only $9.4 billion of bonds with maturities of more than 
ten years, both for cash and exchange. These poor results are in 
part to be associated with increased fluctuations of rates, rising 
competition of federally guaranteed mortgages, and improved status 
of corporate bonds. 31 It should be added that the issue of short-term 
securities in 1961 had the additional advantage of keeping short- 
term rates from falling too much and thus weakening the external 
position of the dollar. 

One of the hottest political debates revolved around the attempt 
of the Eisenhower administration to remove the \ X / A per cent ceiling 
on government securities of five years or longer maturities. In my 
view the Congress was justified in not yielding on this point. This 
is a view not generally shared by economists. Many reasons can be 
adduced in support of the refusal of the Congress to yield in the 
latter part of 1959. Among them was the high interest rate policy 
of the Federal Reserve, which partly explained the high Treasury 
rates. Removal of a ceiling enacted in 1918 would have facilitated 
a monetary policy by the Federal Reserve with which the Congress 
was not sympathetic. In view of the small issues of long-term securi- 
ties in earlier years when rates were much lower, it was difficult 
to understand why the administration suddenly found itself in dire 
need of rates in excess of 4~y 4 per cent. Interestingly enough, the 
Kennedy administration removed the ceiling with little fuss : a ruling 
of the Attorney General made clear that the Treasury could issue 



194 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

securities at a discount and thus in fact pay more than 4}i per cent. 
At least in 1961 there seems little disposition to sell issues yielding 
more than \ X / A per cent. 3 - 

3. Tax policy. Eisenhower's tax policy, as reflected in the 1954 
legislation and the views expressed by members of his administra- 
tion, and especially Secretary Humphrey, were directed largely to 
reducing taxes, and in a manner to stimulate savings and invest- 
ment. President Kennedy also would like to keep taxes down; but 
he is more disposed to have taxes determined by the required 
services of government rather than, as Secretary Humphrey would, 
have services contained by a policy of declining taxes. In another 
respect also there was a difference. Kennedy would reduce taxes 
to treat a serious recession; Eisenhower would reduce them in the 
midst of a boom. 

In the tax proposals of 1961, the Kennedy administration further 
suggested the lines of its tax policy. In his tax message of April 20th 
the President said: 

The tax system must be adequate to meet our public needs. It must 
meet them fairly, calling on each of us to contribute his proper share to 
the cost of government. It must encourage efficient use of our resources. 
It must promote economic stability and stimulate economic growth. 
Economic expansion in turn creates a growing tax base, thus increasing 
revenue and thereby enabling us to meet more readily our public needs 
as well as our needs as private individuals. 33 

The President's Message and the Secretary's supporting state- 
ment reveal some party differences in approach to tax problems. 
Like the Republicans, Kennedy would also use more generous 
depreciation allowances as a means of stimulating investment. But 
the investment credit flow offered, which allows tax credits for 
investments primarily for amounts in excess of depreciation allow- 
ance, yields large additional investment in comparison with the 
costs to the Treasury. Kennedy also would use taxes as an engine 
for correcting economic ills, in that he would reduce the differential 
in favor of investment abroad — and thus incidentally improve the 
balance of payments. His program also tends to emphasize issues 
of equity more than that of the preceding administration. Despite 
its comprehensive look at tax issues, the Eisenhower administration 
was silent on the abuses of excessive deductions of expenses by 



Kennedy on fiscal policy 195 

businessmen; and bestowed special favors through the exclusion of 
the first $50 of dividends and a 4 per cent credit against taxation 
of such dividends in excess of $50. Kennedy would revoke these 
provisions, in part because the expected gains of investment were 
not realized, and in part because the advantages accrue predomi- 
nantly to high-income groups which share disproportionately in 
dividend income. 

Removal of another inequity follows from a proposal that the 
tax on dividends and interest be collected at the source. Since it is 
estimated that $3 billion of this income escapes taxes, the resultant 
gains would be about $600 million per year. 

In one discussion of fiscal and tax policy, Kennedy and Nixon 
seemed largely to agree — except that Nixon would strive to pay off 
the massive debt whereas Kennedy would repay only in periods of 
high activity. But a close look, especially at the various television 
programs and written statements during the campaign, shows sub- 
stantial differences. Nixon opposed collection of dividends and inter- 
est at the source; would especially reduce the income and corporate 
tax as a means of favoring incentives; and insisted that the tax bur- 
den was excessive. For Kennedy, the way to deal with the tax burden 
was to stimulate growth and thus reduce the burden of a given 
amount of taxes. 34 

Clearly the Kennedy administration is not going to be overgen- 
erous to those with high incomes, though there have been hints of a 
desire to reduce marginal rates substantially below the 91 per cent 
maximum. But this will only mean more equitable distribution: the 
revenue lost will be recouped through elimination of numerous 
loopholes — for example, income excessively subject to capital gains, 
excessive depletion allowances. It is possible to raise several billions 
additional through increased taxes of estates, downward adjustment 
of standard deductions, elimination of deductions of personal inter- 
est, and so on. Then the issue would be how the savings would 
be used. Possibly for larger services; possibly for reducing rates for 
the low-income and the highest brackets. Democrats are likely to 
use substantial parts of any savings for public services. 

It is likely that the Kennedy administration, unlike the preceding 
administration, will be as concerned with stimulating consumption 
as investment. It is not clear that we are underinvesting. The Euro- 
pean example of high investment is not really germane, because 
the Europeans start from a low level. We need more public invest- 



196 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

ments as well as private; and much investment is capital saving. 
At any rate, any large rise of private investment is wasted if the 
resultant consumption goods fail to find buyers. A greater emphasis 
on stimulating consumption has been a tenet of Democratic policy 
for a long time. 

Erosion of the tax base brings higher rates. Hence one approach 
to bringing rates down is to broaden the base. But if standard de- 
ductions are greatly reduced or eliminated, the effects on consump- 
tion are likely to be serious. The struggle in the next few years is 
likely to revolve around the issue of whether the major savings 
should be through reduction of standard deductions, favored treat- 
ment of the old, and so forth, or through such abuses as excessive 
expense accounts, evasion of taxes on property income, excessive 
depletion allowance. My guess is that a Democratic administration 
is likely to favor the latter. 

4. Defense and the budget. Earlier I discussed the excessive weight 
given to budgetary considerations in determining defense policies. 
Any one who has any doubts about the primacy of the budget over 
security under Eisenhower should read Chapter 19 of Sherman 
Adams's recent First-Hand Report: 

. . . Eisenhower insisted upon looking at every big defense spending 
proposal in the light of what effect it would have on the economic 
strength of the country. . . . 

. . . George Humphrey was correctly reported at that time to be 
standing guard over the public purse and opposing many of these ex- 
pensive programs [military] . . . Eisenhower invited Humphrey to the 
meetings of the National Security Council to express his opinions as 
though he were a member. . . . 

. . . The presence of the Government's fiscal watch dogs at the meet- 
ings reflected the President's belief, often voiced, that the nation could 
be destroyed by spending itself to death as well as by force of 



arms. 



35 



Nixon supported the President in his fear of the military bring- 
ing bankruptcy. ". . . and he [Nixon] says there is nothing the 
Russians want more than for the U.S. to spend itself into defeat. 
Over and over he tells us that the real crisis is not the missile gap, 
not Berlin, but the possibility that the Nation will ruin its economy 
trying to keep up with the Russians." The Democratic Digest re- 



Kennedy on fiscal policy 197 

minds its readers that Nixon's votes in Congress were often in oppo- 
sition to adequate military outlays. 36 

In the 1960 campaign, however, it was a new Nixon. 

". . . We must maintain a military strength second to none. . . ." 
( He now seemed to abandon the Eisenhower military policy which 
he so strongly supported in the 1950's. ) 

". . . We shall put security first, and the tax situation second. . . . 

". . . There must be no dollar sign on what we are willing to 
spend to keep America the strongest nation in the world. . . . 

". . . We must expect that our defense expenditures are going 
up. . . 

". . . We also need small war capability. 

". . . We cannot rely exclusively on an existing weapon, as the 
last Administration relied on the manned bomber, when new weap- 
ons such as ICBM's threaten to make them obsolete. . . ." 

Nixon also blamed Congress for appropriating %\ 1 /o billion less 
than the President had proposed. But what if the President had 
proposed to spend $30 billions more in those six years. Would not 
$20-30 billions more have been spent? 37 

Kennedy's position has been much more consistent. In discussing 
the military program in the Senate on August 14, 1958, he said: 

"Perhaps the most serious result of this complacency . . . was 
our willingness to place fiscal security ahead of national security." 38 

In the campaign Kennedy had this to say: 

"... I think the American people are willing to undergo what- 
ever is necessary for the world's best defense. . . . 

". . . On the contrary, it is the people who say America cannot 
afford to spend the money . . . who in truth are selling America 
short." 

He complained that defense was absorbing a declining part of 
GNP: 

The next President must promptly send to the Congress a special 
message requesting the funds and the authority necessary to give us a 
nuclear capacity second to none, making us invulnerable to any attack, 
and have conventional forces so strong and so mobile that they can stamp 
out brush fire war before it spreads. 39 

President Kennedy presented his first Message on the Defense 
Budget to the Congress on March 28, 1961. Here he repeated the 
position he had taken for years. "Our arms must be adequate to 



198 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

meet our commitments and ensure our security, without being 
bound by arbitary budget ceilings." 40 

In this first defense budget the President presented the budget 
for 1961 $1 billion in excess of the Eisenhower 1961 budget. But 
the major part of this is explained by ( 1 ) underestimates of outlays 
by the Eisenhower administration ($750 million), (2) accelerated 
contract placements in 1961 (in excess of $200 million), and (3) 
new proposals of the President ( $65 million ) . For the 1962 budget 
the Kennedy rise is about $900 million, of which about $200 million 
are underestimates by Eisenhower of costs of his programs. 41 

In a sense even Kennedy's proposals were disappointing. The 
Gaither, Rockefeller, NPA, and the Democratic Advisory reports 
urged much larger rises of military spending. But several points 
should be noted. First, the figures are net, for the Kennedy program 
also includes some economies. Second, the time was not yet avail- 
able for a thorough appraisal of what has to be done. Third, since 
the March report, the Kennedy administration has pushed a space 
program that is likely to cost about $600 million in F.Y. 1962 and 
much more in later years. The 1962 budget review of October 1961 
revealed a rise of $5 billion in security outlays for F.Y. 1962 over 
F.Y. 1961. 

In short, we are not likely to have any more of the nonsense that 
an increase of $5 billion in the military budget in a $400-600 billion 
economy is going to bring bankruptcy; and especially where the ad- 
ditional outlays in a tired economy are likely to bring additional 
income out of putting unemployed resources to work. Moreover, 
bankruptcy, whatever that means, when the economy gains $20 
billion a year, is a disease of tertiary importance compared to the 
evils of a serious loss of deterrent power associated with unwise 
economies. The President is moving in the right direction though he 
may share to a small degree Eisenhower's unwarranted fear of ex- 
cessive spending for defense. In the campaign Kennedy noted that 
every objective committee, every private or public study, every 
objective inquiry by independent military analysis — these and 
others have "stated candidly and bluntly that more is needed to give 
us the protection for our security. . . ." 42 

Conclusions 

1. The Kennedy fiscal policies diverge sufficiently from those of 
Eisenhower to justify a description of a change in direction. 



Kennedy on fiscal policy 199 

2. The President is not as tolerant of temporary deficits as most 
economists are. But there are important political issues that econo- 
mists, qua economists, can more easily neglect than the President. 

3. In 1961, large deficits are likely to be a political liability. But 
continued 6-7 per cent unemployment in 1962-1963, for which the 
administration is- likely to be blamed, may well be even a greater 
political liability. Hence the importance of the 1963 budget pre- 
sented in January, 1962. 

4. Greater use of fiscal policy as an economic weapon is on the 
Kennedy agenda — to treat recessions, stimulate growth, correct 
balance of payments. 

5. So far Kennedy weighs more heavily measures to reduce the 
gap in GNP and increase the growth rate than those to treat a mild 
cyclical recession. 

6. Unlike the Eisenhower administration, Kennedy ties expendi- 
tures to GNP and sees the need of rising outlays. Had not the 
Eisenhower administration increased nondefense outlays by 45 per 
cent? 

7. Arbitrary budget limitations are no longer to determine de- 
fense policies. 

8. Anxious to stimulate investments, the Kennedy administration 
will nevertheless seek "also to maintain consumption as a means 
of validating an adequate investment program." 

A final word on the 1963 (year ending June 30, 1963) budget. 
After two years of deficits, and high levels of activity, President 
Kennedy wants at least a balanced budget for 1962-63. This is con- 
sistent with what he has learned from economists since the War. 
Should the economic rise disappoint, then a deficit will emerge, a 
factor containing a possible economic decline. 



Part V 



RECESSION, GROWTH AND 
UNEMPLOYMENT 



21. Republican treatment of recessions 



yi In Yonkers, New York, on October 29, 1952, candidate Eisen- 
hower said: 

At the first sign of any approaching recession in this country there 
would be instantly mobilized under the finest professional, business, labor, 
and other leaders that we have, every resource of private industry, of 
local government, of state government, and of Federal Government to 
see that never again shall recession come to us. 

This statement in various forms was made time and again during the 
1952 campaign, and the President reassured the country early in 
1954 of a determination to use every weapon. Moreover, we have 
seen that in a sense he did use one crucial weapon, tax reduction, 
though the general view now is that this weapon was not used as 
part of an application of the theory of fiscal policy but rather to 
provide a tax cut to the President's supporters. 

Again in a panel discussion with seven women on October 24, 
1956, the President, speaking of the possibility of decline of the 
economy, said: "And this I can certainly assure you. If there are any 
signs that show up that look as if we are going the other way, every 
thing the government can do — every single force and influence 
that can be brought to bear — will be brought in timely fashion 
and not after any such catastrophe occurs." 

But the President did not always succeed in keeping this prom- 
ise. Undoubtedly here the great influence of his persuasive Secre- 
taries of the Treasury, Messrs. Humphrey and Anderson, was deci- 
sive. 

Robert J. Donovan clearly reveals the strong influence of Hum- 

203 



204 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

phrey in the course of the 1954 recession. 1 In general the President 
was anxious to do something quickly and forestall any serious 
decline. The Chairman of the Council of Economic Advisors, Arthur 
Burns, also made numerous suggestions for treating the recession 
and these included programs for spending. Humphrey continued 
to insist on caution, a balanced budget, and the like. Under great 
pressure he agreed to move forward expenditures that were to be 
made in any case. 

Causes of the 1957-1958 Recession 

Many experts think that the recession of 1957-1958 was the 
result in no small part of an investment boom in 1955. Woodlief 
Thomas, Economic Advisor of the Federal Reserve Board, quoted 
Arthur Burns as follows: "'The emergence of excess capacity was 
the basic reason for the downward revision of business investment 
programs that became fairly general after mid-1957. However, other 
factors, largely of a financial character, also contributed to this 
development. . . . Another was the high and rising level of interest 
rates. A third was the reduced availability of bank credit. . . 

Woodlief Thomas agrees with this analysis, except that he said: 
"With respect to credit, as I have suggested, the problem was not 
too little credit but too much in some areas." 2 

There is no doubt that government operations as well as credit 
policy had something to do with the recession. 

For example, in the calendar year 1955, the Federal Govern- 
ment's deficit on a cash basis was $729 million, but in 1956 this was 
converted into a surplus of $5,525 million and in 1957, one of $1,194 
million. The government had become an absorber of potential 
spending funds instead of a net disburser and hence contributed 
toward inadequate buying. In this connection a large cut in new 
defense contracts in the second half of 1957 should not go unnoticed. 

A dear-money policy cut the increase of active money to 3 per 
cent in 1956 and to 1 per cent in 1957. This is indeed a low per- 
centage increase for an economy that is supposed to grow several 
per cent a year and an economy in which an increased proportion 
of the total supply of cash is hoarded as incomes rise. 

The following tabulation indicates the effects of the federal 
programs. The contribution of consumer credit and mortgage debt 
tended to decline from 1955 on. Once the economy gets accustomed 
to substantial increases in this kind of credit, a reduction in the 



Republican treatment of recessions 205 

contribution tends to have a depressing effect. This, in turn, is of 
course related to the rate of interest. 

Billions of Dollars Change, 1955, 1956, and 1957 

1955 1956 1957 

Consumer credit + 6.4 + 3.4 + 2.7 

Mortgage debt +16.2 +14.7 +11.6 

How to Deal with the Recession 

By the fall of 1957 it was clear that a recession was on the way. 

On February 27, 1958, the Joint Congressional Economic Com- 
mittee recommended a vigorous easing of monetary policy, a rise of 
public expenditures of substantial proportions and then concluded: 

If monetary action, expenditure measures, and other actions, public 
or private, fall short in stemming recession and promoting recovery, tax 
reduction will be in order, but such action is not now recommended. 
The Committee is confident that the tax-writing committees of the 
Congress will keep a close and continuing watch on economic and 
budgetary developments and will be prepared to move quickly in 
enacting general tax reduction if needed. 3 

Senator Douglas went further in a minority report. He would 
have cut back taxes immediately and was not enthusiastic about the 
rise of public expenditures, in part because of the delays in getting 
the money spent. 

The administration's position was clear from the beginning; in 
fact, early in 1957 the Secretary of the Treasury responded to a 
question put by a newspaperman who wanted to know what the 
administration would do if there were a considerable decline in 
plant and equipment expenditures. Would not under these condi- 
tions government recommend a speed-up in government expendi- 
tures on construction, he asked? Secretary Humphrey at that time 
answered as follows: 

I don't think so, Joe, no ... I will put it this way; we didn't do it 
the last time, did we? Pressure was brought on us to do it. We didn't do 
it, and it worked. . . . We didn't cut taxes until we got ready for a 
balanced budget, until we saw it in hand and it came true. 4 

In a letter to the Republican leaders, William Knowland and 
Joseph Martin, on March 8, the President made clear his antireces- 



206 }0, THE ECONOMICS OF THE POLITICAL PARTIES 

sion policy. By this time we had had nine months of recession. The 
President was prepared to accelerate some programs and to depend 
on monetary policies, but there was nothing in the letters that indi- 
cated that he would depend to any large degree on the rise of 
public spending or reduction of taxes. In fact, the letter reflected a 
general hope for the upsurge in private spending. 

Dear Bill: 
Dear Joe: 

. . . My Feb. 12 economic statement emphasized a number of im- 
portant considerations : 

First, that current economic developments, including increased un- 
employment, with its severe hardships for those individuals temporarily 
out of work, are of deep concern to us all; 

Second, that the basic factors making for economic growth remain 
strong, justifying expectations of early economic improvement. . . . 

Still concerned over the recession, the President sent a letter to 
a number of his administrators, in which he urged acceleration of 
work on urban renewal project sites and other public works, for 
which funds were already available. 5 

Of course, the Democrats were critical of Eisenhower's caution 
in dealing with the recession. The March 1958 Democratic Digest 
poked fun at the President's confused comment at a news confer- 
ence in re sl tax cut. 

In the Democratic Digest of May, 1958, the Democrats com- 
mented on ex-President Truman's recommendations for dealing 
with the recession. He would both have a tax cut of $5 billion and 
increase public spending. To stop the recession, however, "is only 
part of the problem," he said. "We must also restore the growth of 
our economy ... to meet the needs of a growing population." 

On March 12, 1958, the Washington Daily Netos reported that 
the Democratic politicians were plugging primarily for more spend- 
ing, whereas the administration preferred a tax cut. This was quite 
consistent with past views. 6 

In the Congress Senator Douglas took the lead in urging a tax 
reduction. There was not unanimity in the Democratic party on this 
issue. Senator Douglas, of course, would also implement a tax re- 
duction program with direct aid to the unemployed. 7 

In his May 19 statement Senator Douglas was careful to criti- 
cize the perverse fiscal policies of the government. He emphasized 



Republican treatment of recessions 207 

the point: "Further and most important, if there is a danger of a 
serious decline, the government should cut taxes quickly so as to 
pump purchasing power into the economy and to help turn the 
economy from a state of contraction into a state of expansion." Next 
to an improvement of unemployment benefits, tax cuts should have 
a high priority and should be used quickly, rather than as a last 
resort. He also stated clearly the difference between the policies of 
the individual and of the government when confronted with declines 
of income. ( The former had to economize, the latter to expand. ) In 
reply to those who argued that a tax cut would be inflationary, 
Senator Douglas pointed out that at the then low levels of output 
and excess capacity, a substantial rise in the deficit would not bring 
about an inflation. Furthermore, if a tax cut were effective, it would 
increase output and, therefore, provide additional income. 

It was the unanimous opinion of the six experts who had ap- 
peared before the Joint Economic Committee only two weeks be- 
fore, said Douglas, that inflation would not be a major threat as 
a result of a $6 billion tax cut. 

On May 1, 1958, the Washington Post & Times-Herald editorial- 
ized in favor of a tax cut as the means of dealing with the recession 
and preferred this to a massive program of public works. And on 
May 2 The New York Times wrote as follows: "The Administration's 
policy of attacking the steadily lengthening business recession by 
the device of wishful thinking seems to have moved into the des- 
peration stage this week. . . ." 8 

Pointing out that the recessions of 1948-1949 and 1953-1954 had 
been treated by tax cuts and successfully, Walter Lippmann urged 
a- tax cut on the government at this time. 

If the President is wrong in counting upon a recovery beginning this 
summer, he is taking a very great risk on not setting up stronger measures 
before the present session of Congress adjourns. . . . 

The situation is one where it is wiser to over-insure, rather than to 
under-insure. . . . 9 

Professor Sumner Slichter, in an interview with the U.S. News 
&■ World Report 10 also urged a tax cut and an increase in public 
expenditures. In its March, 1958, report, 11 the CED urged a more 
vigorous monetary policy and an increase in the debt limit that 
would allow the government to spend more money and to allow 
the deficit to increase as tax revenues dropped. Should the reces- 



208 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

sion deepen, then the CED would recommend a tax cut and re- 
scheduling of government expenditures. 

The Authors Views on the Treatment of the Recession 

In a letter to the Washington Post & Times-Herald, May 29, 
1958, 1 wrote as follows : 

We have now had ten months of a recession, ten months of a declin- 
ing economy. . . . 

So far the anti-recession measures have been inadequate; and most 
of those taken have been forced upon the reluctant Administration by a 
Democratic Congress or have been automatic results of built-in flexibility 
— e.g., the decline of the tax receipts with reduced income and the rise 
of unemployment benefits. 

I then estimated that the federal outlays were not likely to rise 
more than $3 billion above those for calendar year 1957. Actually, 
the results seem to have been a rise of $2% billion for fiscal year 
1958 over 1957 and $4% billion for calendar 1958 over 1957. 

But they should have learned a long time ago as most economists and 
an increasing group of businessmen have learned, that the way to keep 
a deficit down is to raise income; and the way to increase income is for 
the government to reduce taxes and increase spending — in the midst 
of a recession. . . . 

Senator Bush replied to my letter in the Congress. 12 His major 
points were that federal outlays would rise at least $5 billion over 
the fiscal year ending June 30, 1958; and the administration was 
pushing hard on all kinds of spending projects and the Federal 
Reserve policy had been more than adequate: ". . . The President 
has opposed using recession as an excuse to initiate the kind of 
wholesale increase in federal spending which would accomplish 
little except to leave the federal budget in shambles for years to 
come." 

In a statement before the Senate Finance Committee on April 
24, 1958, I pointed to a decline in the economy at the rate of $10-15 
billion a year and the failure to offset the decline. I urged strongly 
a rise of public expenditures of $4 billion above the President's 
suggestion of January, 1958, and also a tax cut of $3% billion for 
six months to be repeated if necessary. It was also necessary to have 
a real cheap-money policy. 



Republican treatment of recessions 209 

In a speech before the Senate, Senator Bennett on July 15, 1958, 
replied to my evidence before the Senate Finance Committee. He 
pointed out especially that I had not weighed sufficiently the reduc- 
tion of reserve requirements as a facet of a vigorous cheap-money 
policy on the part of the Federal Reserve. 13 

In a statement before the Advisory Committee on Economic 
Policy of the Democratic National Committee of September 19, 
1958, I also criticized the administration policy. The administration 
allowed the Federal Reserve to help bring on a recession and 
aggravate it. In the face of the most severe business recession of 
the postwar period, the administration refused to take aggressive 
measures to treat it, not through spending programs or tax cuts 
or a real cheap-money policy. Indeed, we have had some recovery 
since the middle of the year, but the rate of recovery has been 
much below what could have been achieved, with a monthly cost 
of several billion dollars and a few millions unemployed so long 
as full recovery is not achieved. Whatever recovery we have had 
has been the result of the flexibilities introduced into our system 
as the result of tax reforms of the years 1933-1952 and the Social 
Security program. The administration not only failed to assume 
leadership through a tax cut and an adequate spending program, 
but the President vetoed the Area Redevelopment Act, opposed the 
Omnibus Housing Act, approved with strong objections the Emer- 
gency Housing Bill on April 16, 1958, restrained educational legisla- 
tion with the result that the major educational programs, despite 
Sputnik, provided less than $900,000,000 in four years. Long before 
recovery had been achieved, the Federal Reserve had introduced a 
restrictive monetary policy. 

Conclusion 

It is now clear, as I write these lines in 1960, that we achieved 
a very good recovery in 1959. The President and his advisors took 
this as a vindication of their optimism about the automatic forces of 
recuperation in our private economy. What they overlooked, how- 
ever, was the loss our nation sustained as a consequence of its fail- 
ure to maintain steady economic growth. If our economy had grown 
in 1958 at the rate of the years 1947-1957, our gross national prod- 
uct in 1958 would have been $468 billion instead of $437 billion. 
Thus an apathetic policy denied the American people a vast quantity 
of ICBM's, houses, schools, roads, consumer goods, which might 



210 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

have been made available out of the lost production. And this is 
quite apart from the risks of even more severe economic collapse 
inherent in a policy of inaction. 

It is now clear that we have incurred a deficit anyway and that 
recovery owed a great deal to this $13 billion deficit in the fiscal 
year 1959, the very deficit that those in charge of the administration 
were so concerned about. It is of interest that this deficit of fiscal 
1959 exactly coincided with the recovery period of the recession. 
For by the middle of 1959, the recovery was clearly achieved. 

These large deficits that contributed so much to the recovery 
were not the result, primarily, of actions taken by the administra- 
tion, but, as I have indicated, the result of measures taken in the 
1930's and 1940's — especially the large rise of transfer payments 
under the Social Security program and the automatic stabilizers in 
the system, resulting from past farm and labor legislation and the 
changed structure of taxes, under which large cuts in receipts ac- 
company declining economic activity. These account for a large 
reduction of tax receipts equal to about one half of the deficit. The 
administration could not take credit for various other effective 
measures taken, such as the increase in pay for civilians and military 
personnel, which gave the economy a boost, as well as a general 
rise of pay, which served as a temporary boost to the economy. 

One idea never seemed to permeate the administration: namely, 
that a cut in taxes or a rise of expenditures of, say, $5 or $10 billion 
would increase income by a multiple and might even, through rising 
tax receipts, improve rather than worsen the federal budgetary situa- 
tion. 

I must, however, add a footnote here. In January, 1961, appeared 
the Staff Report of the Bureau of the Budget, Federal Fiscal Be- 
havior During the Recession of 1957-58. Here the able Director 
of the Budget, Maurice Stans, presents a convincing case against 
additional public expenditures as countercyclical measures: they 
are often costly because not reversible; they are to some extent 
substitutes for private spending; and the timing of impact leaves 
much to be desired. The major spending programs that contributed 
to improvement, in fact, were not introduced as countercyclical 
measures. But Stans fails to deal with the possibility of a tax cut as 
a way out; and in view of the very heavy unemployment in the 
second half of 1958 and the heavy incidence in the first half of 
1959, it is not clear to me that the large $13 billion cash deficit in 



Republican treatment of recessions 211 

F.Y. 1959 was wasteful. It contributed to a reduction of unemploy- 
ment. Finally, as Stans admits, automatic stabilizers were of great 
importance, and this is part of fiscal policy. 

As I wrote in July, 1961, the history of the 1958-1961 cycle is 
clear. Here a changeover from federal deficits to surpluses esti- 
mated as high as $24 billion and a hardening of interest rates un- 
paralleled in a hundred years resulted in an unprecedentedly short 
recovery period and the 1960-1961 recession. The Nixon Report on 
Price Stability and Economic Growth of June, 1959, which urged a 
budgetary surplus and the greatest economies in public spending, 
was a warning of what was to come. 14 Again, the Administration 
insisted on a balanced budget as the medicine for a recession. The 
1960-1961 recession, coming after this large reduction in federal 
contributions, was further evidence of the potentially beneficial 
effects of a tax cut. 



22. Growth* 



}0L In recent years, the economists working with the Democratic 
party have pressed hard for more growth. Interest in growth stems 
in part from Keynesian economics. Full employment of resources 
is a prime objective of Keynesian economics, and obviously growth 
is stunted by unemployment. But growth economics is more than 
Keynesian economics; for it depends, for example, on numbers in 
the labor market, and productivity, only in part determined by the 
amount of unemployment. 1 

Growth has become a large political issue between the parties, 
with the Democrats being articulate and the Republicans reluc- 
tantly taking up the challenge. At first the latter tended to minimize 
its significance, but later they criticized their opponents' espousal of 
increased rates of growth, associating the proposed Democratic 
gains with more government spending. 

We can measure growth by the rise of output as measured in 
dollars. The usual measure is gross national product (GNP). But for 
some reasons, it is preferable to measure growth by the rise of 
output per capita. The latter gives us some idea of our rising pro- 
ductivity and also gives us some notion of the trends in the stand- 
ards of living of our people. 

The more rapid our rate of growth, the more resources are avail- 
able for private spending for food, clothing, housing, and so on, 
and also more is available for the necessary services that only 
government can provide. With adequate growth, the economy can 
provide higher standards of living and also increased services by 
government. The latter is especially important when one considers 

* This chapter is adapted from a paper I wrote for a meeting with Senator 
Kennedy at Hyannis Port in August, 1960. 
212 



Growth 213 

that the Federal Government spent 20 per cent less in dollars of 
stable purchasing power in 1959 than in 1940 for nondefense pur- 
poses, and all governments reduced their nondefense outlays from 
Sy 2 to 5% per cent of gross national product. In this period our 
output more than doubled. Indeed, we are starving our public 
services. 

With greater growth, we could also have more resources for 
defense. To give just one example, if our growth in the years 1952 
to 1959 had matched that from 1947 to 1952, we would have had 
$70 billion more of gross national product in 1959. This would have 
yielded $12 billion more of Federal Government revenue. With these 
resources, we could easily have spent the few more billion dollars 
necessary for defense and yet put no additional burden on the 
taxpayer. We could also have done a more adequate job in health, 
housing, education, urban redevelopment, and the like. 

The Arithmetic of Growth 

Varying rates of growth are reflected in large differences in gross 
national product, for the compound interest law is at work. Thus 
assume a 2 per cent rate of growth for one country and 7 per cent 
for another. In twenty years the increase is not 40 per cent (20 x 2) 
and 140 per cent (20 x 7) but 49 and 287 per cent. The average 
gain becomes about 2y> per cent for the country gaining at 2 per 
cent ( the Eisenhower rate roughly ) , and 14 per cent for the country 
gaining 7 per cent a year ( the Russian rate ) . 

To give a further idea of how the compound interest rule works, 
let me quote some figures. At 2 per cent rate of growth, the gross 
national product would rise by 22 per cent in ten years, but at a 
4y 2 per cent rate of growth, which is a probable rate here with 
good management and no recourse to controls, the increase would 
be 55 per cent, and at the Russian rate of 7 per cent, the increase 
would be 97 per cent. 

In twenty years the respective increases would be 49, 141 and 
287 per cent, and in forty years 121, 482 and 1,398 per cent. 

In more concrete terms, we could take Mr. Nixon to task for 
having made fun of "growthmanship" and having said that the 
Russian output could not possibly exceed American output even 
by the year 2000. 2 Actually, at the Eisenhower rate of growth, the 
United States by the year 2000 would have a GNP of over $1,200 
billion, but the Russians, starting with a GNP in 1960 of less than 



214 ^f THE ECONOMICS OF THE POLITICAL PARTIES 

half the United States', but growing at their 7 per cent rate, would 
have a GNP of $3,375 billion, or almost three times as large. Even 
a 5 per cent rate for the U.S.S.R. would yield a GNP roughly equal 
to ours in the year 2000 if we continue the Eisenhower rate of 
growth. This suggests how important it is that we keep our rate of 
growth at 4 to 5 per cent and, on the assumption that the Russians 
cannot maintain a 7 per cent rate for a long period of time, the 
relative gains of the Russians would be small. We cannot allow 
them to grow much more rapidly than we do, especially since they, 
through their system, can get a much more effective use of their 
resources for the development of their military machine. 3 

Much depends on management. Thus we had the resources 
from 1929 to 1933; but output declined by 29 per cent, and unem- 
ployment rose to 13 million or 1 in 4 unemployed. Management 
was bad. 

From 1933 to 1952, our growth averaged 7 per cent a year, or 
4 1 /) per cent compounded. This was good management, especially 
if we consider the heritage of a stubborn depression in the 1930's. 

From 1947 to 1953, annual growth averaged 4.6 per cent; but 
from 1953 to 1960 the growth rate was about 2.3 per cent. 

Most experts agree that we can have a GNP of around $750 
billion in 1970 compared to $525 billion now. But good management 
is assumed. In fact, the National Planning Association, one of the best 
research organizations in the country, has estimated that we could 
well have a GNP of $790 billion by the year 1970. But this does not 
come automatically; it requires imaginative, judicious and a sensible 
management. The Republican Committee on Programs and Progress 
says "that by wise private and public policies, we should attain 
sustained growth in the vicinity of 4 per cent a year. ... It would 
give us a $900 billion economy by 1976." 4 

Some critics have suggested that we ought to compare 1945- 
1953, not 1947-1953, and then the record of the Democrats would 
not seem so impressive. 5 But there is some question of the wisdom 
of including 1944 to 1947 when military spending dropped by $77 
billion, or more than one third of GNP. What is remarkable about 
the abnormal period, 1944 to 1947, was how well we did in view 
of this tremendous demobilization. No other demobilization after 
a major war had been nearly so successful. In another sense the 
critics have a point. The years 1950-1952 were war years and the 



Growth 215 

major gains under Truman were in these years: yet this may be 
conceding too much; for defense outlays in 1960 prices averaged 
$34 billion from 1947 to 1953, and $47 billion from 1953 to 
I960. 6 

But perhaps what is most significant about the comparison of 
the Truman and Eisenhower years is the rise of gross national 
product per person. Here the annual figures are 2.5 per cent for 
Truman and 0.6 per cent for Eisenhower. In other words, the gains 
in productivity and potential standards of living were four times 
as great under Truman as under Eisenhower. In fact, one might 
argue that the record from 1953 to 1959 was one of the least satis- 
factory in our history, with 75 per cent of the growth being ex- 
plained by rising population. 

An interesting exercise in arithmetic is the following. Compare 
actual GNP in 1953-1960 with that under growth levels achieved 
from 1947-1952. In stable dollars, the loss in these years was $305 
billion; in federal revenues, $44 billion and in man-years of employ- 
ment, 43.5 million. The last exceeds the amount of unemployment 
and thus includes the resultant rise of numbers on the labor market 
and does not allow for loss of jobs associated with rising produc- 
tivity. This is the roughest of calculations, but it has some signifi- 
cance. 

A continuation of a growth rate of 2Y 2 per cent would yield us 
only $713 billion by 1975 as compared to a yield of $971 billion, or 
$258 billion more, if the rate of growth should be 4% per cent, the 
record of the years 1947-1953 and a goal of Democrats. It remains 
to be seen whether this will be achieved. In fact, the year 1961 is 
likely to yield less than 3 per cent growth; but the Democrats 
should not be held responsible for 1961 any more than the Repub- 
licans can be held responsible for 1953. The 1962 improvement, in 
the view of most, should be about 8 per cent. But how long can 
that be maintained? 

Determinants 

To understand what has to be done we must take into account 
what determines growth. Among the important factors are the rate 
of scientific and technological advances, the rate of investment, 
the average age of our capital plant, our standards of education, 
health and welfare, the ratio of the labor force to the population, 



216 }0i. THE ECONOMICS OF THE POLITICAL PARTIES 

the percentage of unemployment and those not working, changes in 
the number of hours of work, and the quality of management, both 
of business and government. 

We should not underestimate the importance of public policy. 
For example, in 1957-1958 we had a recession which was brought 
on in part by unwise monetary policy and prolonged by a failure 
of the monetary authority to reverse its policies. When, early in 
1958, private spending was declining at an annual rate of almost 
$20 billion, the President had proposed an increase in spending 
of only $1 billion (annual rate) and refused to support a cut in 
taxes. For various reasons, a rise of spending and a reduction of tax 
receipts, despite the failure to act, brought a $12-13 billion deficit 
in F.Y. 1959. Had the government moved more quickly in increas- 
ing monetary supplies, in giving help through increased public 
spending and reduced tax rates, the recession would have been 
much shorter and the loss of income much less. A modern recession, 
even if it is not a depression, may well cost the economy $30-60 
billion. Hence, if we are to have maximum output and therefore 
minimum unemployment, we must above all provide the nation 
with adequate supplies of money. This has not been done since 
1952. Technically, growth to some extent — similar to the older 
concept of secular trend — should be measured with seasonal and 
cyclical fluctuations removed; 7 but nevertheless the substantial 
cyclical declines do reduce the net rise of output. 

Growth Versus Price Stability 

A smart administration seeks maximum growth, minimum in- 
flation and equity for all classes. But it is not always easy to achieve 
all objectives, and gains in one area may be at the expense of losses 
elsewhere. 

The Eisenhower administration above all sought price stability, 
and in so doing sacrificed growth to some extent. In allowing the 
Federal Reserve complete freedom in denying the economy ade- 
quate supplies of money, the President was in part responsible for 
the hundreds of billions of dollars of GNP lost over a period 
of eight years resulting from stunted growth. The President 
might allow the Federal Reserve independence in the weapons 
used as long as they reveal skills in using them; but he could 
not afford, having set goals, to allow the Federal Reserve to 



Growth 217 

move one way and other government agencies to move in opposite 
directions. In these perilous times we need all our weapons and 
an integrated policy based on their use. 

The Democratic view was well expressed in an official statement: 
"Among Democrats the economic stagnation of the past six years, 
during which time the Nation's needs have been dangerously ne- 
glected, was a far more serious threat [than inflation]. . . . Full 
employment and full production, along with a program to meet the 
lag in domestic programs over the past six years, were not only 
essential to the security and well-being of all Americans, but they 
might help solve the inflation problem. . . ." 8 

The nation's goal should be one of keeping the rise of prices 
down to less than 1 per cent a year. With a 5 per cent rate of growth 
an inflation of less than 1 per cent could be feasible. With a 5 per 
cent rise of output per year and a rise of prices of less than 1 per 
cent, most Americans would receive increases of incomes several 
times the losses due to inflation. And there are ways of protecting 
those in need and with incomes not responding to rising prices. 

Aside from the unwisdom of starving the economy for currency 
and treating a possible inflation through a reduction in the supply 
of money when the causes of inflation are known to be in large part 
elsewhere, I suggest a number of positive programs. 

Positive Goals for Growth 

First, we should invest more of our resources in education. One 
of the striking features of our economic development since 1900 is 
that investment in education has risen several times as much rela- 
tively as in physical capital. And this relative rise in our investments 
in education has contributed to our very rapid increase of output 
in the last sixty years. Several studies by distinguished economists 
have shown that technology, much more than increases of capital, 
explains the rising productivity of our economy — evident in much 
larger rises of output than input of factors. Another indication 
of what education can contribute is suggested by the fact that the 
average lifetime income of our adult population without any edu- 
cation is $72,000; for those who graduate from the elementary 
school, $145,000; and for those who have gone through college, 
$333,000. Actually, those who are graduating from college today 
can look forward to a lifetime income over what is available to the 



218 ^t THE ECONOMICS OF THE POLITICAL PARTIES 

high school graduate of about $200,000. The college education is 
not the whole explanation of the difference, but it is an important 
part. 

Second, health measures are important. 

In the 1960 budget, when the Congress upped the President's 
proposals for spending on medical research, the President vigorously 
protested. Budgetary considerations, as usual, were paramount. Yet 
improved health facilitates the balancing of a budget. Reduced 
sickness and avoidable deaths yield additional income and tax 
revenues. 

For example, Dr. Howard A. Rusk, the eminent expert of The 
New York Times said: "Between 1944 and 1952, medical research 
and improved medical education have reduced the death rates from 
all causes by 9% per cent. Five full years have been added to the 
average life expectancy. As a result of these and other advances, 
the lives of 845,014 Americans have been saved in the last eight 
years. They earned and added $1.5 billion to the national income 
in 1952 alone and the federal government profited by $234 million 
in income and excise tax receipts." 

A Republican committee had this to say about the cost of dis- 
ease: 

Disease imposes on the nation an economic burden — partly visible 
and partly hidden— of major proportions. 

For example, the annual tax bill for care of the mentally ill in public 
institutions is $lVi<> billion. 

These costs are visible. Added to them is the even larger burden that 
takes the form of lost manpower to industry and to the armed forces, 
lost production, lost wages, lost income tax. The cases of cancer alone 
that were diagnosed in 1953 have been estimated t.o have cost society 
$12 billion in lost goods and services — . . . these visible and hidden 
costs of disease are catastrophic in human as well as economic terms. 
They break and shatter families. . . . 

Senator Margaret Chase Smith in a press release said: "We are 
spending only at the rate of $1 a year for every American that can 
be expected to die of cancer, which sum is $15 a year less than what 
Americans spend on lipstick." 

In 1959, the President complained at the increasing funds made 
available for research. But in May, 1960, a group of experts ap- 
pointed by the Senate Appropriations Committee urged an immedi- 



Growth 219 

ate rise of medical research expenditures by the Federal Govern- 
ment from $400 to $664 million and envisaged a need of $3 billion 
by 1970, of which $2 billion would be the cost to the Federal Gov- 
ernment. 

Third, another way of stimulating growth is of course to spend 
more money on research generally and to spend it wisely. It is now 
estimated that in 1959-1960 more than $12 billion of this nation's 
output is used for research and development in the United States. 
Of this sum, the Federal Government provides more than half. 
Most of this money goes for development purposes and particularly 
in relation to defense. Greater outlays for nondefense research would 
yield multiple returns. 

Only about $500 million are spent by the Federal Government 
for basic research, and the general view of scientists is that this is 
most inadequate. For it is basic research that ultimately leads to 
the great discoveries that save lives and bring about important 
inventions that cut costs and make a greater variety of goods and 
services available to the American public. 

The President's Assistant for Science and Technology recently 
wrote: 

While it may be said that scientific research enriches our understand- 
ing and technology our material welfare, all too frequently is basic science 
seen as a less useful, long-hairish appendage of technology, and tech- 
nology as both the discovery of new knowledge and its use. When this 
misconception becomes ingrained, then as night follows day, both science 
and technology suffer. 

Consider for a moment some facts about technological developments, 
selected almost at random from various fields which illustrate their valid 
relationship. The history of modern development of nuclear power, for 
example, stems directly from Fermi's experiments on the reactions of 
neutrons with heavy atomic nuclei, which were a part of abstract re- 
search in nuclear physics during the late 30's. The television industry had 
its beginnings in basic research on thermionic emission and in abstract 
studies in the photoelectric effect. In 1905, Einstein gave the first rational 
explanation of this effect, laying down the foundation for modern televi- 
sion. 

Fourth, a rise of investment is important. 

On the average, capital per worker rises about 1 per cent per 
year. Accumulation of capital contributes to rising output. The lower 
the rate of interest, the lower the costs of production of machinery 



220 }0k THE ECONOMICS OF THE POLITICAL PARTIES 

and equipment, the larger depreciation funds and undistributed 
profits, the greater the use of capacity, the better the business 
climate, the more capital will become available. But mere accumula- 
tion of capital in itself does not contribute a great deal — in fact, one 
study showed that, aside from accompanying technological advances, 
rising supplies of capital contribute only about one eighth of the 
rise of productivity in the nonfarm sector. Hence, the overriding 
importance of education, research, increased flow of scientists. 

Fifth, growth depends also on the supply of labor. Consider, for 
example, that of the 15 million over sixty-five, only about one third 
are members of the labor market. This is the result partly of dis- 
crimination against the old and also the result partly of the pro- 
vision in the Old Age Insurance program which penalizes the re- 
cipient of benefits who takes a job. An additional million older 
workers would increase our gross national product by $5 billion or 
more a year and much more in ten years. 

A more general problem is, however, the total number of work- 
ers and hours of work. In so far as we keep unemployment down 
and in so far as we encourage a larger proportion of the population 
of working age to go to work, the larger our income will be. Because 
our dependent population, both young and old, tends to rise, it is 
important to mobilize larger numbers of workers in the 1960's. The 
possibilities are suggested by a rise in the labor force of 9 million 
from 1941 to 1944, and a decline of 5 million from 1944 to 1946. 
When management is good and employment prospects excellent, as 
in the war years, larger numbers join the labor market, and particu- 
larly older workers and women. 

Nor do we make the best use of women in the labor market. 
A further contribution could be made by improved vocational 
guidance and information that results in the optimal movement of 
workers to sites of jobs. 

How much we produce will also depend on the number of hours 
of work. In the last sixty years, the number of hours of work has 
been on the average reduced almost 1 per cent per year. Output is 
reduced by cuts in the hours of work, though not proportionately. 

If we take our gains of increasing productivity for the 1960's 
in increased leisure then we could achieve the 32-hour week that 
many labor leaders are now demanding. But so long as our struggle 
with communism continues unabated, this would probably not be 
a wise policy. We could, however, take some of the gains in a mod- 



Growth 221 

erate reduction in hours and increased leisure, and some in im- 
proved public services. In the last fifty or sixty years we have taken 
more than half our gains in an increased standard of living and a 
little less than half in more leisure. 

With minimum unemployment and substantial rises of new 
workers, and only a moderate decline in the number of hours, with 
growth of capital at a fairly rapid rate and its replacement in ac- 
cordance with the demands of modern technology, then, according 
to recent estimates, we could have an annual gross national product 
rise of almost 5 per cent. On less optimistic assumptions, a growth 
of 3 to 4 per cent could be had. Again I assume good management. 

Other Factors 

These, of course, are not the only issues that determine how 
fast we grow. We want to cut down the inroads of monopoly be- 
cause monopoly in general restricts output. 

We want to assure the nation of adequate demand or buying 
power for our goods. It is no use increasing our output by 5 per cent 
a year, or 63 per cent in a period of ten years, if the purchasing 
power is not available to buy these goods. Therefore, we require 
a tax system not like that proposed in 1954 and put into effect to 
some extent, but one that gives a fairly wide distribution of income 
and spending power. Appropriate monetary, tax, public spending 
and debt policies are indispensable for assuring adequate spending 
to match our vast flow of goods and services. 

In short, if we concentrate on doing those things that make for 
growth, namely, keep our investment up, work hard, manage our 
economy so that we have maximum output and minimum unemploy- 
ment, and on top of that increase our productivity through adequate 
education, improved health, adequate and proper allocation of 
research funds, improved housing, making more effective use of the 
old and women on the labor market, and ridding the economy of 
monopolistic features, and also provide adequate demands through a 
proper tax and spending program, then we shall have growth of 4 
or 5 per cent rather than the rate of a little more than 2 per cent 
of recent years. The difference will be tremendous in our competi- 
tion with communism, and also in providing the underprivileged 
with the minimum standards of living that they should have. Unless 
we grow by 3y 2 per cent a year, not only do we fail to reduce 
unemployment, but it actually increases. 



23. Kennedy and his 

opponents on growth 



}0t In the preceding chapter, I discussed the elements of the growth 
problem; and suggested that the parties disagreed on the impor- 
tance of growth, on the manner of achieving it, and on the trends 
under Truman and Eisenhower. 

Republican Views 

In the years 1956-1960, when the Democrats were inflating the 
growth issue, the Republicans tended to be silent or highly critical. 
We can find some exceptions. Nelson Rockefeller, as we noted else- 
where, was a notable exception and he probably contributed as 
much as anyone to the dissemination of the growth thesis. By the 
middle of 1959, the Republicans began to take note of the problem. 
The Task Force on Economic Opportunity and Progress and the 
Nixon Report on Price Stability and Economic Growth ( 1959 ) both 
acknowledged the need of growth; but also emphasized the recourse 
to private incentives, for example, reduction of high bracket tax 
rates, as the road to greater growth. 

"Our Republican program seeks a strong rate of economic 
growth by fostering private initiative, not by resorting to vast public 
spending and loose money policies. . . ." x 

By July, 1960, even President Eisenhower had to enter the 
debate. Complaining of the great amount of misinformation on 
GNP, the President boasted of a 25 per cent rise of GNP in 7% 
years and he added, ". . . during the almost eight-year duration 
of the prior, Democratic administration, the GNP actually declined 
in every single peacetime year, save one." 2 

Nixon commented on the growth problem on numerous occa- 
sions. 3 His general position is given by the following: "Right policies 
222 



Kennedy and his opponents on growth 223 

to get growth is not through relying upon government action, . . . 
but through increasing opportunities and incentives for expansion 
of the private sector of the economy." 

Nixon's statistics did not always agree with Democratic sources. 
In his view, growth was twice as great under Eisenhower as under 
Truman. Real wages had risen by 15 per cent in seven Eisenhower 
years, but only 2 per cent in Truman's seven years. The official 
Democratic position shows a greater rise under Truman; but the 
Democrats leave out of account 1945-1947 when wages lagged be- 
hind the large rise of prices. Kennedy would compare 1933-1952 
and 1952-1960. 4 In appraising the Democratic lag in growth, Nixon 
also argued that a party that never cured unemployment in the 
1930's and brought so much unemployment cannot be trusted with 
growth. "Spurring economic growth is too vital a matter for Amer- 
ica to be left to those with such a record." 

Kennedy on Growth 

In the campaign Kennedy concentrated on growth even more 
than Nixon. On at least 20 occasions in his campaign speeches he 
discussed the issue. His emphasis was unlike that of Nixon. The 
Senator was concerned that growth had been low in recent years; 
that the U.S.S.R. rate was 3 times ours; that the United States had 
the slowest rate of any advanced industrial nation. In suggesting 
therapy, he urged lower rates of interest, coordinated monetary and 
fiscal policies, increased spending for education, housing, and so on, 
the outlays to be financed out of rising income. Only in proposing 
tax changes to spur investment was his policy in agreement with 
Nixon's. The 32-hour week was out because it would restrain neces- 
sary growth. 5 

President Kennedy emphasized the need of a greater rate of 
growth in his first important economic message given on February 
2, 1961. 6 With a rise of labor force of 1.5 per cent and of produc- 
tivity of 2 per cent, the potential growth is 3% per cent. But, the 
President adds, we must do better. In recent years the gains had 
been only 2% per cent. "In the fourth quarter of 1960, actual out- 
put could have been 8 per cent higher than it was." What Kennedy 
would do to stimulate growth is clear from the agenda for the 
Congress: programs for housing, depressed areas, special tax incen- 
tives to investment, investment in human resources ("Another fun- 
damental ingredient of a program to accelerate long-run economic 



224 )0. THE ECONOMICS OF THE POLITICAL PARTIES 

growth is vigorous improvement in the quality of the nation's human 
resources . . ."), and investment in natural resources. 

A good indication of the striking contrast of views on growth is 
given by comparing the 1961 President Eisenhower Economic Re- 
port and the first presentation of the new Council of Economic 
Advisors. In his own statement President Eisenhower merely men- 
tioned balanced growth; but offered no comments on deficiencies 
of growth or measures to stimulate growth. His major concern was 
a balanced budget and a provision to be enacted by Congress of 
the objective of stable prices. Eisenhower's Council's own report 
of more than 100 pages devoted virtually no space to the growth 
problem. A 2-page section merely commented on the rise of educa- 
tional standards, research and labor force, and there was a dis- 
cussion of rises in output of sectors of the economy; but no discus- 
sion of the growth problem. 7 

But Kennedy's Economic Council, in an 82-page presentation 
to the Joint Economic Committee, discussed primarily the growth 
problems: the problems of the recession, of the chronic slack, of 
accelerating growth; and even the discussion of monetary and fiscal 
policy was oriented around the issues of growth. Price stability re- 
quired three pages. 8 

Growth and Recession 

We have already noted that frequent recessions yield a smaller 
rise of output over the years than an economy without these reces- 
sions. Technically, losses from recessions should be allowed for in 
estimating growth. But in the political domain the issues revolve 
around net rise of GNP, a figure that takes account of cyclical and 
secular movements. Failure to treat recessions will result in reduced 
gains of GNP. On this score the Democratic record is better than 
the Republican, whether the comparison is made for the years 
1929-1932 and 1933-1940 or 1952-1960 and 1961. In the early 
1930's, Hoover's medicine was reduced expenditures and rising 
taxes, a therapy which would correspond to presenting a tran- 
quilizer to the patient who needs more energy and stimulation. In 
1958 and 1961, the Democrats revealed a much greater disposition 
to treat a recession than to let the "recession take its course," the 
approach that more nearly describes the Republican attitude. It 
may well be that in 1961, as many economists claim, President 
Kennedy did not move fast enough. Perhaps the most critical treat- 



Kennedy and his opponents on growth 225 

ment was in an able article by Oscar Gass. Yet Gass tends to 
neglect the political realities, the difficulties confronting any Presi- 
dent who tends to move too far ahead of the current beliefs. 9 The 
wisdom of Kennedy's caution is perhaps supported by the fact that 
the Congress dragged its feet in 1961 on numerous programs. 

The first condition for treatment of a recession is to recognize it. 
Undoubtedly in part for political reasons, though in part because 
of lack of economic analysis, the Republicans seemed to be blind 
to the presence of a recession in 1960. In a well publicized speech 
of September 28, Secretary of the Treasury Anderson said: 

... it is my strong view that the outlook for economic activity in 
this country is favorable both for the near future and for many years 
ahead. 

. . . The inventory adjustment appears to be nearing completion. . . . 

Nor was Nixon prepared to see a recession. 10 

Anderson was speaking after several months of a recession. He 
should have known that the situation was not encouraging. As early 
as July 25th, Professor Paul Samuelson, a Kennedy advisor, wrote 
for the London Financial Times: 

... I should have to state frankly that the evidence is strong that 
we are now on the brink of a recession, if indeed we have not been in 
one since January. 

I mean that the bulk of the economic indications that have in the 
past been supposed to give the signal for the impending downturn have 
been sending us pessimistic messages for a very long time. 11 

Anderson was unduly optimistic on the general situation; but 
he proved to be especially inept in his comments on the inventory 
cycle. The decline was clearly at an end only ten months after he 
spoke. 

In his January 18, 1961, Report, President Eisenhower finally 
admitted "that production and employment declined in the latter 
part of 1960, and unemployment rose, owing in large measure to 
an inventory adjustment." 12 Unlike Arthur Burns, he did not asso- 
ciate the decline with the rise of interest rates and the restrictive 
effects of the government budget. 

In the Presidential campaign, Nixon also could not see the 
recession. The economy was in excellent condition, he said in Sep- 



226 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

tember, for retail sales, the best index, proved this fact. 13 As late 
as October 27 and 28, he was highly critical of Kennedy for pre- 
dicting a recession. 

My opponent says we are going to have a recession. . . . Are we? 
The answer is "No, we're not going to have one, and he knows it." He 
knows it. He's reading the paper as I do. He knows it, the economy is 
moving up. . . . 14 

Nixon also tended to take a line that was very popular with 
the Eisenhower administration. Employment and wages were at a 
record level. But this was not proof of a no-recession economy. 
Gaining a little each year is not enough. 15 We have to improve 
about 3y 2 per cent to keep unemployment from rising. 

Though he was sure there was no recession, Nixon suggested 
measures to deal with unemployment. Government spending should 
be highly selective, and not be made available for the distant future 
when the stimulus may no longer be needed. Tax cuts were prefer- 
able. It was more important to stimulate the private economy — for 
its GNP was $400 billion against $100 billion for the public economy. 
Distressed area unemployment, which is partly cyclical, especially 
interested Nixon. His major point here was that somehow the admin- 
istration bill, though it offered only a small proportion as much 
money as the Douglas bill, would provide the relevant towns more 
money than the Douglas Area Development Bill. Thus Erie, Penn- 
sylvania, would receive $1.47 million from the Republican bill and 
only $675,000 from the Democratic bill. 16 

Recession and unemployment were matters that also concerned 
Kennedy. (I deal with unemployment in the next chapter.) He 
stressed especially, time and again, the problem of automation and 
its treatment. It was to him one of the most important problems. 
Hence the need of training, and allocation of defense contracts in 
favor of distressed areas. The Area Development Bill was a frequent 
item for discussion. Kennedy was clear that we were in the midst of 
a recession. 17 

His emphasis on automation is suggested by two questions: ". . . 
how can we provide for the orderly transition from present produc- 
tion methods into new production methods without displacing our 
workers . . . how can we provide labor-saving machinery at the 
same time maintaining full employment? . . ." 18 



Kennedy and his opponents on growth 227 

In general, the Democrats are more aware of recessions than 
the Republicans, and in part because they are more concerned with 
output than with prices. Nixon's failure to observe a recession may 
be excused to some extent because the admission of a recession 
might cost votes, Yet the analyses of Eisenhower, Nixon and Ander- 
son, even allowing for the political requirements, left much to be 
desired. 

Economists are also critical of President Kennedy for not taking 
more active measures. I have tried to explain his reluctance. A 
relevant factor is also a tendency to stress the long-run factors in- 
clusive of structural unemployment and growth against the reces- 
sionary factors; and in particular because the cyclical recovery 
seemed to be progressing. Kennedy's interest in labor legislation in- 
clusive of area redevelopment, training of manpower, and automa- 
tion, is evident in his campaign speeches when he stressed these 
factors much more than recession, of which he was clearly aware 
during the campaign. 

Republican failure to deal adequately with recessions is expli- 
cable in part by an ideology that reduces the contribution of gov- 
ernment, and to some extent, despite the contributions of Arthur 
Burns, a lack of adequate economic analysis or its use. The most 
important policy maker under Eisenhower was Secretary Humphrey 
(later Secretary Anderson). What did Humphrey stand for? As 
Edwin Dale, a shrewd observer, explained: first and foremost, as 
little government as possible; second, for minimum taxes (and 
hence maximum private incentives); and third, against the use of 
modern fiscal tools. With a future slump, "Secretary Humphrey 
said he would probably resign if the government did what practi- 
cally everybody these days thinks it should do in such a situation — 
deliberately push its budget into the red. . . ." 19 

One should compare this position with that of Kennedy's top 
advisors and their teachers. Thus in a reply to Arthur Burns, the 
Council urges rising expenditures to treat the gap. 20 Hansen, for 
example, looks forward to the rise of $8 billion of public spending 
that prevailed in two earlier recessions, and also discretionary tax 
cuts; and Colm wants a stimulus that will supplement the modest 
rise of government spending in order to get private investment, 
consumption and housing moving upward — a condition for a genu- 
ine recovery. 21 

In summary, the Democrats stressed growth, the Republicans, 



228 ^M THE ECONOMICS OF THE POLITICAL PARTIES 

rather late, accepted the challenge. In the campaign, at times, 
Nixon demanded a high rate of growth as loudly as Kennedy. But 
there was a difference in techniques for achieving large growth. 
Whereas Nixon stressed private incentives and tax reform, Kennedy 
focused attention on monetary and fiscal policy, strong antireces- 
sionary policies and increased expenditures on education, science 
and natural resources. 22 



24. Kennedy on unemployment 



}£L Unemployment is one of Kennedy's toughest problems, for with 
each succeeding cyclical rise, the residue of unemployment tends to 
increase. In seven months ending in July, 1961, unemployment was 
4.9 million seasonally adjusted, or 6.8 per -cent of the labor force, 
a total in July of 1 million above the figure for a year earlier. In 
economic policy, Kennedy has had two bad breaks, one the adverse 
balance of payments, a deterrent to pursuit of policies needed for 
domestic needs, and second the sluggish economy reflected in a 
rising volume of unemployment, once the recovery from a cyclical 
decline is achieved. 

In the years since 1953 we have not approached the less than 
2 per cent of unemployment of the war years or the 3 per cent of 
the years 1951-1953. These low levels suggest what low rates of 
unemployment high levels of demand may bring. The Kennedy goal 
of 4 per cent is modest compared to these achievements. The steady 
deterioration is evident in the following: 

45 Months' Rise 35 Months' Rise 25 Months' Rise 
November, 1948 August, 1954 April, 1958 







to Peak 




to 


to 






July, 1953 




July, 1957 


May, 1960 


No. of months unemploy- 












ment below 5 per cent 




42 




34 


1 


it 4 per cent 




35 




3 





ii 3 per cent 




11 










Source: Adapted from 


R. 


Lekachman, 


"Can 


We Lick 


Unemployment 


New Leader, April 3, 1961, 


P- 


4. 









Periods of rising activity tended to be shorter and the months of 
low unemployment less numerous. 

229 



230 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

Policy makers are increasingly concerned over the treatment of 
this excess unemployment. Serious differences have emerged even 
between the President and his advisors. Here, for example, is a state- 
ment by the Council: 

Some have attributed the growth of unemployment in recent years 
to changing characteristics of the labor force rather than the deficiencies 
of total demand. . . . Expansion of over-all demand, it is argued, will 
not meet this problem; it can only be met by educating, retraining, and 
relocating unsuccessful job-seekers. 

. . . Only an insignificant fraction of this rise can be traced to the 
shift in composition of the labor force. The growth of unemployment has 
been a pervasive one, hitting all segments of the labor force. 

The Council agrees that vocational training, measures to improve 
the mobility of workers and so on are necessary. 

But there are no substitutes for fiscal, monetary, and credit policies 
for economic recovery. . . . Unemployment pockets that now seem in- 
tractable, will turn out to be manageable after all in an environment of 
full prosperity. 1 

A different view was presented by Chairman Martin of the 
Federal Reserve Board: 

To have important effects, attempts to reduce structural unemploy- 
ment by massive monetary and fiscal stimulation of overall demands 
probably would have to be carried to such lengths as to create serious 
new problems of inflationary character — at a time when consumer prices 
already are at a record high. 2 

Martin's position was subjected to strong criticism, for many 
believed that Martin had dwelt on the intractable structural un- 
employment as an excuse for not expanding monetary supplies as, 
in the view of many, were required. In a letter to the Washington 
Post, I also pointed out that beyond a certain point fiscal and mone- 
tary policy would be extravagant weapons for treating structural 
unemployment. But I also emphasized the large contribution of 
monetary and fiscal policy. The importance of general measures is 
suggested by the much larger decline of employment in declining 
industries in years of depression than in years of prosperity. 



Kennedy on unemployment 231 

... In textiles, employment declined by an average of almost 1 per 
cent in the 9 good years, and by an average of 8.5 per cent in the 4 bad 
years. In coal mining (bituminous) the decline averaged 4 per cent in 
the 9 good years, and 16 per cent in the 4 bad years. 3 



Later I studied employment in eight industries that experienced 
a decline of jobs from 7.4 million to 5 million from 1945 through 
1958. The percentage of drop in eight good years was 1 per cent; in 
five bad years, 8 per cent. 4 

These statistics point to the great importance of appropriate 
monetary and fiscal policies. But the direct attack on unemploy- 
ment, for example, retraining, bringing new industries into de- 
pressed areas, is also very important. In European countries, both 
monetary and fiscal policies and direct attacks have been used. De- 
spite the greater recourse to the general weapons, many of these 
countries have also used the direct attack much more than in this 
country for treating structural unemployment. Thus the British ex- 
perienced a range of unemployment from 10 to 22 per cent in the 
interwar period and only 1.75 per cent (average) in the years since 
the war; and, despite a stable population, added 1 million workers. 
General demand conditions were the most important single factor; 
but the British went far in determining the location of new plants, 
in providing vocational guidance and retraining. These factors un- 
doubtedly contributed to a decline of unemployment in troublesome 
areas from 38 per cent in 1932 to 4 per cent in 1959. 5 

One aspect of the treatment of the President's Economic Council 
deserves special attention. In their view, there has been no signifi- 
cant change in the proportion of those subject to structural unem- 
ployment — for example, the old, the young, women, Negroes, those 
with low skills or in certain occupations. "Only an insignificant frac- 
tion of this rise [of unemployment] can be traced to the shift in 
composition of the labor force." 6 

But the treatment of industries is not adequate. The industrial 
breakdown by the Council is too broad. Manufacturing, for example, 
and transportation and public utilities are treated as a whole. The 
general rise of unemployment from 1957 to 1960 is put at 30 per 
cent, for manufacturing at 24 per cent, and for transportation and 
public utilities at 39 per cent. ( The latter is a substantial rise vis-a- 
vis the over-all figures. ) 7 



232 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

I studied eight industries that experienced a decline of jobs from 
7.4 million to 5 million from 1945 through 1958. In those 13 years, 
these eight employments experienced a decline of % in jobs though 
all jobs rose by 12 million, or more than one fifth. These figures do 
point to substantial changes in the composition of labor and unem- 
ployment. 

Another indication of the change of unemployment related to 
structural factors is given by the following. Where goods-producing 
employment tends to rise, the proportion of unemployment also 
tends to rise. 

Changes in Unemployment Resulting from Structural and Labor Force 
Changes 1948 to 1956 (000's) 

Structural Labor Force 

All +113 +266 

Goods producing +215 + 83 

Service rendering employment — 102 +183 

(Goods-producing industries accounted for 43 per cent of the labor force 
and 55 per cent of the unemployed; Service industries 57 per cent and 
45 per cent respectively.) 8 

How much structural employment? Estimates vary. 

One guide is the amount of unemployment in distressed areas. 
This is only an indication, however, because part of the unemploy- 
ment in distressed areas is seasonal, transitional and cyclical, though 
a large part is also structural. Mr. W. McC. Martin said: 

The problem of structural unemployment is manifest in the higher 
total of those left unemployed after each wave of the three most recent 
business cycles, and in the idleness of many West Virginia coal miners, 
Eastern and Midwestern steel and auto workers, West Coast aircraft 
workers, and like groups, in good times as well as bad. 9 

But surely part of this rise may well reflect cyclical unemployment. 

Distressed or surplus labor areas are those with 6 or more per 
cent unemployment over a considerable period. Much structural 
unemployment prevails in these areas. 

According to an official estimate, unemployment in 179 dis- 
tressed areas in May, 1959, was 1,091,000 and accounted for 32 per 
cent of total unemployment. The rate in these areas was 10.8 per 
cent as compared with a national rate of 4.9 per cent. 



Kennedy on unemployment 233 

Late in 1960 there were about 500,000 idle in distressed areas. 
By early 1961, 600,000 were idle in these areas, and by the spring, 
800,000. The relevance of general conditions is revealed by the 
rising numbers of such areas as business conditions deteriorate: 
January, 1955 = 44 major areas; 1956 = 19; 1957= 19; 1958 = 45; 

1959 = 76; 1960 = 31. Again, whereas only six areas had more than 
12 per cent unemployment in six bimonthly estimates in 1957 ( 1 per 
year average), the corresponding figure in the recession year 1958 
was 76 (13 per year average). Unemployment persists in these 
areas. Of 116 classified as distressed areas from July, 1953, to March, 
1958, only 41 were not so classified in March, 1958. 10 

Unemployment in distressed areas gives some indication of 
structural unemployment. But the substantial increase in numbers 
of distressed areas and unemployed in periods of depression sug- 
gests that a substantial part of this unemployment is not structural; 
and, of course, structural unemployment is to be found everywhere, 
not merely in distressed areas. 

Such factors as automation, foreign competition, change of tastes, 
migration of industry, depletion of natural resources are felt in many 
places other than depressed areas. 

The NPA has suggested one way of estimating structural un- 
employment. Estimate unemployment at the top of a boom, deduct 
an estimated transitional unemployment of 2 per cent, and the re- 
mainder is structural unemployment. On this basis, the NPA finds 
structural unemployment to be: 

3rd quarter 1953 — 500,000 
4th „ 1956 — 1,500,000 
1st „ 1960 — 2,000,000 n 

But this is not entirely satisfactory. The 2 per cent estimate of 
transitional unemployment is only a guess. Moreover, part of the un- 
employment at the top of a boom is seasonal or even cyclical. It is 
doubtful that, for example, the authorities had by the first quarter 
of 1960 stimulated the economy to a point where all cyclical unem- 
ployment had been eliminated. A remarkable stability of prices in 

1960 as compared to 1959 also does not suggest a degree of demand 
stimulation to exclude all cyclical unemployment. 

In short, estimates of structural unemployment are not easily 
had. The substantial unemployment in depressed areas; the related 
fact that unemployment in these areas for 26 weeks or longer is 



234 ]& THE ECONOMICS OF THE POLITICAL PARTIES 

twice as great as in the nation; the large and rising unemployment 
at the peak of succeeding booms; the great deterioration of employ- 
ment conditions in the declining industries — all of these point to a 
substantial amount of structural unemployment, more in recession 
periods and less in prosperous periods. It would be surprising in- 
deed if on the average the total was less than 1 million or more than 
2 million. At least 1% million of unemployment is the minimum 
figure for transitional unemployment. The remainder is divided be- 
tween cyclical and structural. 

The most significant part of structural unemployment is the 
long-term. Mr. Ewan Clague of the Bureau of Labor Statistics esti- 
mates that in January, 1961, with unemployment 6.6 per cent, long- 
term unemployment was 1,338,000; at the (roughly) 4.4 per cent of 
the prosperous years 1955-1957, long-term unemployment had de- 
clined to about 600,000. Of course, this long-term unemployment is 
the most troublesome and a large part of structural unemploy- 
ment. 12 

In earlier discussions in this chapter, we noted the conflict of 
views between the Council and the Federal Reserve, the importance 
of structural unemployment, and the large contribution that general 
fiscal and monetary measures would make toward reducing struc- 
tural unemployment. The crucial issue is, does one apply general 
measures such as tax cuts, public spending, and low money rates, in 
the hope that the additional purchasing power will ultimately spill 
over to Fall River, Massachusetts, Wilkes-Barre, Pennsylvania, and 
Detroit, Michigan, sufficiently to bring high employment in these 
towns, or does one treat local infections through area programs, in 
the thought that a head cold does not need surgery of the chest. The 
debate does not center on either/or, but rather on how much of 
each. The general measures are the more important in my view 
though I doubt that, however important general measures are, they 
will solve the problems, say, of Fall River, Massachusetts, or Detroit 
or Huntington, West Virginia. 

Where does the President stand? The President seems committed 
to both approaches, but undoubtedly less to the general approach 
than many economists would recommend. The reasons are obvious. 
The special approach calls for much less money. In sending his 
message to the Congress on Manpower Training the President said 
that his program would be of special importance in "abating un- 
employment and achieving full use of our resources. . . ." 



Kennedy on unemployment 235 

The unemployed whose skills have been rendered obsolete by auto- 
mation and other technological changes must be equipped with new skills 
enabling them to become productive members of society. 18 

Yet this program for on-the-job training, vocational education, in- 
creasing mobility, and the like involving 800,000 workers over a 
four-year period was to cost only $700 million, or $175 million per 
year. 14 These are small sums compared to the about $8-10 billion 
increase of GNP, requiring about $3-4 billion of additional federal 
money to bring about an additional million man-years of employ- 
ment through general measures. (About $8-10 billion additional 
income in all is required, but it is assumed the original expenditures 
have a multiplier effect. ) Of course the 800,000 retrained would not 
all find jobs; but those who did would presumably find employment 
for many years on the average. 

Should one out of eight find a job as a result of the operation of 
this act and for an average period of eight years, then there would 
be 800,000 additional jobs at a cost of $700 million, or less than 
$1,000 per man-year employment minus savings on unemployment 
compensation and the gains of tax receipts. Any gains of jobs related 
to this program assumes, of course, that deficiency of demand is 
not an obstacle. 

Hence economy of federal outlays is one reason for the Presi- 
dent's partiality to the specific attacks. His interest in the Area De- 
velopment program also rests in part on similar considerations. A 
point made earlier is also relevant. Because of his interest in un- 
employment compensation, labor legislation, and his close work with 
labor leaders, the President is inclined to stress the specific attacks. 
The Keynesian or general approach is not one that appeals to labor 
experts in Washington nearly so much as the specific attacks, nor 
are they as well informed on the efficiency of the general approach. 
But education here came relatively late. 



Part VI 

WELFARE 



25. Welfare programs 



Trends 

In this chapter, I shall present an over-all survey of welfare 
policy. In succeeding chapters, I shall consider more intensively 
programs for the old, education, medicine, the unemployed, housing 
and urban redevelopment and depressed areas. 

Until the Great Depression, public expenditures for welfare 
were relatively small, and were largely concentrated on state and 
local government. In the years of the New Deal and the Fair Deal 
the government embarked on numerous vital welfare programs: as- 
sistance to the destitute, public works to provide jobs and stimulate 
spending, unemployment compensation, old age and survivors' in- 
surance, low-rent public housing and urban redevelopment, 
veterans' educational benefits, the Hill-Burton Hospital Construc- 
tion Act and many other bits of legislation. With inflation and the 
growth of the economy, the government tended to adjust the bene- 
fits to the rising price and income level. There might have been 
additional programs, but for the opposition of Republicans and of 
many conservative Democrats. In this respect the Republicans have 
a great advantage over the Democrats. If they encourage any social 
welfare program they are almost certain to receive the cooperation 
of the Democratic party. But the Democrats are likely in this area 
of legislation to receive opposition from the Republicans. 

In general, in recent years a rising burden has been put upon 
state and local governments, which are not really capable of assum- 
ing these additional responsibilities. In the ten years ending 1956- 
1957, the relative rise of all outlays on welfare, exclusive of insur- 
ance, for state and local government was substantially greater than 

239 



240 }gi THE ECONOMICS OF THE POLITICAL PARTIES 

for the Federal Government. This tendency toward putting a larger 
burden on state and local government results in part from the deter- 
mination of the Eisenhower administration to shift responsibilities 
to these governments. 

The tendency to put a much heavier burden on the wage earner 
to solve his problems of social security is suggested by the trend of 
contribution rates under Old Age, Survivors and Disability Insur- 
ance, discussed in the next chapter. 

As we shall see, President Eisenhower, during his campaign, had 
a good deal to say about the great advances he was going to make 
in social security. In earlier years, he had expressed different views. 

On December 8, 1949, at Galveston, Texas, General Eisenhower 
said: "If all the Americans want is security they can go to prison. 
They'll have enough to eat, a bed and a roof over their heads." Most 
Republicans had vigorously opposed the Social Security Act of 1935 
and only voted for it when it became clear that the New Deal Con- 
gress would pass it anyway. Representative Taber, one of the lead- 
ing Republicans, denounced Social Security as a measure "to pre- 
vent business recovery, to enslave workers, and to prevent any 
possibility of employers providing for the people." In 1936, Alfred 
Landon, as a presidential candidate, called social security "a cruel 
hoax" and campaigned for its revision. In the same year, the GOP 
National Committee Chairman started the dog-tag scare, predicting 
that the country's "27 million workers . . . will be numbered with 
metal identification tags . . . made of stainless steel so that they 
will not stain the skins of those who would have them." 

But when President Eisenhower assumed the responsibility for 
the country's welfare he was much more generous in his views to- 
ward Social Security. In fact, he supported extension of coverage 
and liberalization of benefits. But he offered no programs that cor- 
respond in magnitude or importance, for example, with the Social 
Security program under President Roosevelt. Some advances have 
been made, and to that extent Eisenhower deserves credit. Benefit 
payments under old age insurance have been liberalized, and 
coverage has increased. But here the explanation in no small part is 
that the burden is also put upon payrolls and, according to the 
accepted theory, these taxes are ultimately largely borne by the 
workers. The Eisenhower administration insisted upon a self-financ- 
ing program. Under unemployment compensation, as we shall see, 
the Eisenhower administration had done very little. 



Welfare programs 241 

In medicine, the record of Eisenhower is certainly not to be 
praised. In the late 1940's, a number of liberal Republicans, in- 
cluding Senators Flanders, Ives and others, had hoped for a pro- 
gram of comprehensive private health insurance that could be sup- 
ported and made possible by contributions of the Federal Govern- 
ment to provide capital and subsidize low-income groups that could 
not afford to pay the bill. But President Eisenhower never accepted 
this kind of a program, or any other substantial medical program. 

In education, the record also was most inadequate. Under the 
pressure of the Sputnik crisis, President Eisenhower proposed a 
higher education program. But the amount of money voted for a 
four-year program was $900 million. This should be compared with 
the $100 billion, thirteen-year interstate road program proposed by 
the Eisenhower administration. 

In a number of statements, President Eisenhower alleged his 
determination to deal with the problem of local unemployment 
through an Area Redevelopment Program. But the administration 
program provided only $50 million worth of loans — hardly enough 
to help many of the 1 to 2 million unemployed workers concen- 
trated in depressed areas or associated with declining industries. 
When Congress passed a bill in 1959 which would have provided 
about $400 million through loans and grants, the President vetoed 
it, as he did similar legislation in 1960. President Kennedy achieved 
an Area Redevelopment bill in 1961. 

In housing, the Eisenhower administration also tended to be 
very cautious. The President blurred the distinction between loans 
and actual expenditures. He treated an increase in government 
loans for housing in the same way as he would an expenditure that 
would be exhausted and not be reimbursed. Undoubtedly, the ex- 
planation here is, as I note elsewhere, that in our accounting system 
loans are counted as budgetary expenditures. But, in fact, housing 
loans are primarily investments. In his veto message on Senate 57 
(Housing Act of 1959), the President fought an adequate urban 
development program, college housing, and also additional sums 
for FNMA to purchase housing mortgages. 

One of the grievances that the President had against the housing 
legislation was that the rate of interest was below the average cost 
of borrowing money by the Federal Government. The President 
seemed to think this was unfair and wanted to charge the cost of 
borrowing money of equal maturity today. This might make the 



242 }gi THE ECONOMICS OF THE POLITICAL PARTIES 

difference, for example, between something like 3 per cent and 4% 
per cent. In this connection, Senator Sparkman pointed out that for 
borrowings' from the Old Age, Survivors and Disability Insurance 
reserve ($17% billion) the rate the government paid was only 2y 2 
per cent; from the Civil Service Retirement fund ($3^{> billion), 
2% per cent; from the Unemployment Insurance Trust funds ($5-6 
billion), 2% per cent. 1 Yet the President wanted house owners to be 
charged about 4% P er cen t for, say, thirty years, even though the 
long-term rate was abnormally high in 1959 and even though the 
government paid its own trust funds substantially less than 3 per 
cent. 

Breakthroughs in the Eisenhower Administration? 

By 1952, large advances had been made in social welfare. But 
there were — and still are — important gaps. 

Here are a few breakthroughs that might have been achieved 
but were not. An acceleration of the Public Housing and Urban Re- 
development Program, rather than a slowing up of these programs. 
With about 7 million families with incomes of $3,000 or less, we can 
assume that at least 7 million families, or 16 per cent of the total, 
could not afford to pay more than $50 a month: that is, 20 per cent 
or more of their income. Yet the Eisenhower administration slowed 
down the housing program. 

One of the most serious lacks in our welfare program is sickness 
insurance. A man who is covered by unemployment insurance and 
becomes unemployed receives benefits. But if he is unemployed or 
not working because he is ill, he receives no benefits. Here is one of 
the most obvious gaps in our Social Security Program. Indeed, four 
states now have sickness-insurance programs, but there has been no 
new accession for a long time now. In 1957 income loss to individ- 
uals as a result of illness amounted to $6.4 billion. Protection pro- 
vided against this illness by insurance was $1,622 million or 25 per 
cent, and hence, the net income loss was $4.8 billion. But the Eisen- 
hower administration was silent on sickness insurance. It is to be 
hoped that, if the international situation does not deteriorate further, 
the Kennedy administration will tackle this problem. 

Above all, this country needs comprehensive medical insurance. 
The result of this kind of insurance is that more money flows into 
the medical field and through a better time distribution of pay- 
ments, the public is protected much more than it otherwise could 



Welfare programs 243 

be. But no progress was made by the government in the 1950's. 

In medicine much progress could also have been made in financ- 
ing medical schools and providing necessary instruction. In the 
1950's, attempts were made to subsidize medical schools directly, 
on the condition that they accept additional students. The spread 
of medical insurance put increased pressure on existing facilities for 
both buildings and personnel. In order to meet increased need 
for services, it is necessary to have more doctors and, along with 
more doctors, more research and more buildings. But the Eisen- 
hower administration fought vigorously any program for financing 
medical buildings, though ultimately through Congressional leader- 
ship some appropriations were made for research buildings. In 
research, Congress year after year upped the estimates for the 
amount of money required for research. But, to the credit of the 
Eisenhower administration, it should be said that total outlays on 
medical research nevertheless rose at an unprecedented rate. 

In higher education, President Eisenhower accomplished some- 
thing, but not enough. An expert commission was set up, the 
Josephs Commission on Education Beyond the High School. But 
the committee's recommendations, and notably for construction 
grants, were not heeded. 2 

In view of the failure of the President to act more decisively in 
this area, it may be of some interest to indicate the trends during 
these years and notably from 1950-1951 to 1956-1957. In these 
years, the average gross national product rose by $124 billion, and 
total expenditures on welfare programs exclusive of insurance rose 
by $7 billion, or 6 per cent of the rise of gross national product. 
This is a relatively small increase when one considers that this 
type of expenditure — namely, on health, education and the like — 
is likely to grow disproportionately as more elementary needs in- 
creasingly are met. 

But what is of especial significance is that of the total increase 
of $7 billion, the Federal Government accounted for only $1.5 bil- 
lion, and state and local government for $5.5 billion. In other words, 
state and local governments accounted for 78 per cent of the total 
rise of these welfare expenditures, though their expenditures were 
only about 30 per cent of the total of all public expenditures. In- 
deed, many approve this distribution, but inadequate state and 
local resources and interstate competition result in serious gaps in 
our welfare programs: of all federal receipts, welfare expenditures 



244 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

accounted for only 10 per cent of the increase of federal expendi- 
tures, whereas for state and local government, the rise of welfare 
expenditures accounted for 43 per cent of the increased outlays. 
Here we have a bad balance between federal and state and local 
expenditures; the Federal Government has the most productive 
and most flexible tax system, yet nevertheless, the Eisenhower ad- 
ministration continued to urge larger burdens on state and local 
governments. 

In these six years, the major gains of federal welfare expendi- 
tures, other than insurance, were, in order: health and medical serv- 
ices, $888 million; public aid, $501 million; and education, $245 
million. The rise in public aid expenditures was achieved without 
much help from the Federal Government, because the Federal 
Government is bound by existing legislation to provide an increased 
amount as state and local governments increase their contributions. 
In health and medical service, Congressional leadership was very 
important. 

The 1962 Budget is of some interest here (pp. 1021-1023). The 
major welfare programs are included in the following categories: 
Labor and Welfare, Agriculture and Agriculture Resources, Com- 
merce, Housing and Space and Natural Resources. Expenditures in 
these categories rose by 42 per cent from F.Y. 1953 to F.Y. 1961 
(latter estimated). This rise is almost identical with that for gross 
national product. But this is a very broad definition of welfare, 
including some items not strictly in the welfare category, and 
notably agriculture: stabilization of prices and farm income. 

A general rise of 42 per cent is to be compared with the follow- 
ing: 





Per Cent 


Major national security 


- 9 


Agriculture 


+ 68 


Commerce and housing 


+ 35 


Community and housing 


+ 34 


Labor and welfare 


+ 85 


Public health 


+205 


Education 


+ 115 


Science, research, etc. 


+ 500 


Public assistance 


+ 62 


Veterans 


+ 21 



Source: Budget, 1962, pp. 1021-1023. My calculations. 



Welfare programs 245 

Certain reservations are needed here. The outlays under Com- 
merce are underestimated because substantial highway outlays have 
been diverted to trust funds and hence are not included here. More- 
over, expenditures under Trust Funds, in the longer run self-financ- 
ing, for example, unemployment compensation, old age insurance, 
are not included. Finally, had national security outlays kept pace 
with the gross national product, then the case for more generous 
welfare outlays would be greatly reduced. 

Promises and Performances 

In the 1952 campaign, President Eisenhower harped on the 
Republican support of Social Security and even of its extension. In 
his address at Harrisburg, October 7, 1952, he said: "They [the 
Republicans] realize that this government, to be worthy of the 
United States, must be concerned for 155 million people; the educa- 
tion of the young; the health of those who work . . . ; and the se- 
curity and comfort of those among us who are aging and cannot 
take care of themselves." 

At Yonkers, New York, on October 29, 1952, he said: "We are 
dedicated to making them [Social Security programs] better." 

In view of the President's failure to bring about a liberalization 
of unemployment compensation, his unwillingness to propose federal 
minimum standards of benefits, his failure to support an adequate 
program of area development, his statement in summarizing his 
major pledges on November 1, 1952, just before the election, must 
haunt him. 

I pledge that I will support and strengthen, not weaken, the laws 
that protect the American worker. I will defend him against any action 
to destroy his union or his rights. I will enlist every resource — of private 
industry and of the Federal Government to protect him against the awful 
consequences of depression and joblessness. . . . 

In a speech at Pittsburgh on October 27, 1952, he repeated this 
general position. He reminded the city and its residents of the Great 
Depression, and he said: 

Those days must not return. They will not return. To prevent their 
return, I pledge to enlist all the resources of private industry and mobil- 
ize all the resources of the government to prevent the specter of mass 
unemployment from once again visiting our land. . . . 



246 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

We must without regimentation provide a better base for medical 
care. We must in the same spirit have better schools and better education 
for our children. . . . 

These are strong promises, and they come from one who time 
and again in his campaigns congratulates himself on keeping his 
promises. We have already seen the extent to which these promises 
have not been kept and, as we discuss each program, we shall get 
a better insight into what the Eisenhower administration has done 
and has failed to do. The fact is that the President did not gener- 
ally recommend, and often when he did, he failed to follow through. 

Not only had the President failed to deliver, but in the 1966 
campaign he made some strong boasts about all that he had 
achieved. For example, on a television program in Washington on 
September 20, he said: "And they [labor] know that, in the whole 
area of human welfare, every major federal program affecting social 
security, health and education has been improved or expanded to 
the highest point in our history." 

On October 9, in a speech in Pittsburgh, the President said, on 
school aid: 

. . . Not once but twice, in my State of the Union Message of 1955 
... I urged swift action by Congress. For the first time in our history, 
the Federal Government called a great assembly of educators from all 
over the country to help develop a school program; the plan I submitted 
to Congress reflected their wisdom and experience. That five-year pro- 
gram was rejected by the opposition. 

In this and other speeches, President Eisenhower boasted that 
Social Security had been extended to include 10 million more 
workers; that federal programs had advanced, the health of the 
American people had been improved as never before in our history. 
Unemployment insurance had been extended to 4 million more 
workers, and its benefits increased by the states at his urging to 
many more millions. More houses had been built since January, 
1953, than in any comparable previous period in our history. 

It must be said in defense of Eisenhower that he apparently 
had some real sympathy with the Social Security Program. At a 
Cabinet meeting of November 12, 1953, the President had appealed 
"to his associates, to demonstrate unmistakably that the Administra- 
tion was going forward in other fields and was not trying to save 



Welfare programs 247 

money at the expense of the little people. He was sick and tired, 
he said, of the claims of the Democrats that they were the champions 
of the little fellow." 3 

Stevenson on Welfare 

What about the views of the Democratic candidate? In 1952, 
Governor Stevenson did not have much to say about Social Security 
except to boast about the advances that had been made under the 
Democrats. But he made up for it in the next few years. 

At the Columbia Bicentennial Conference on June 5, 1954, he 
said: 

. . . the well-being of the least of us is the responsibility of all of 
us. . . . 

. . . Our schools and hospitals are overcrowded; so are our mental 
institutions and our prisons. Too many of our cities are wasting away 
from neglect. And how can we boast of our high estate when more than 
one of every ten citizens still do not enjoy fully equal opportunities? 4 

In a paper in Fortune in 1955, Governor Stevenson quoted ap- 
provingly a statement from A. J. Toynbee: 

. . . three hundred years from now the twentieth century will be 
remembered, not for its wars, not for its conquests of distance and disease, 
not even for the splitting of the atom — but for "having been the first age, 
since the dawn of civilization, some five or six thousand years back, in 
which people dared to think it practicable — to make the benefits of civili- 
zation available for the whole human race." 

In a speech before the New York University Bellevue Medical 
Center on June 2, 1955, Governor Stevenson made it clear that he 
had given the problem of health a considerable amount of thought. 
He would support a program of comprehensive medical insurance 
with some help from the Federal Government. 

. . . Reducing the uncertainties of insurers' risks may help a little, 
but it doesn't really approach the central problems of raising the money 
to get these programs started and then covering in them the low-income 
and older people who are most in need of more medical service. 5 

Blasting the administration for holding conferences instead of 
providing help, Governor Stevenson, in his address before the 



248 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

National Education Association of July 6, 1955, called out for fed- 
eral assistance for higher education. He would, indeed, have state 
and local governments give as much as they could afford: "Two 
centuries of American history and experience testify that this need 
for federal financial assistance can be met without the slightest 
degree of domination by the central government." 

In the 1956 campaign, Governor Stevenson was even more spe- 
cific in developing his ideas on education and health, which he 
had already presented before the 1956 campaign. He now dealt 
with a number of other Social Security problems and notably with 
the problem of taking care of the old. He made important addresses 
on education, health, older citizens, resources and power and de- 
pressed areas, and, in addition, offered program papers that could 
be reprinted but that time did not allow him to deal with in 
speeches. He also made it a point, in response to criticisms of the 
Republicans, to show that, on the basis of expected rise of income, 
it would be easy to carry through the various programs that he had 
in mind. He could see an increase in cost over a period of ten years 
of $10 billion or more for the programs he suggested, but this 
would be a small part of the gain of gross national product and of 
the increased revenues of the government resulting from the growth 
of the economy. 6 

But by economy in government I meant then, and I mean now, true 
economy. It is economical to avoid waste and to examine every proposal 
with a careful, realistic eye as to its real merit and its financing. It is not 
economical to let needed public services deteriorate, to skimp on needed 
programs of general welfare, to be niggardly with the needs of future 
generations. For what, after all, is economy? It is not simply the accumu- 
lation of great unused storehouses of wealth. It is the wise use of that 
wealth, without waste, and with careful attention to the future's needs; 
it is the use of what we have to serve human living in the wisest way. 7 

He was aware of the cost of these programs but he associated 
them with the rising income to which these programs in turn would 
contribute. These programs would more than pay for their costs out 
of their contribution to rising income. 8 

In 1956, he urged strongly an improvement in our educational 
system with some help from the Federal Government. He quoted 
approvingly H. G. Wells: "Human history becomes more and more 



Welfare programs 249 

a race between education and catastrophe!" 9 In particular in 1956, 
he emphasized the importance of the national program of federal 
aid where local and individual resources were inadequate. 

Welfare Issues Between the Democrats and the Republicans 

The welfare principles of President Eisenhower and his sup- 
porters must now be clear. 

The first and most obvious one is the Republican determination 
to spare the budget as much as possible. Thus, we can explain the 
administration's opposition to the purchases of mortgages by FN MA 
both in 1958 and 1959; the attempt to solve the problem of medicine, 
costing $20-25 billion, with loans of $25 million; the attempt to 
deal with the area development and the depressed areas and large 
amounts of permanent unemployment with a $50 million loan pro- 
gram; again the attempt to treat the problem of public schools by 
an offer, costing little, to share the financing of the bonded interest 
required to build schools. In order to give the budget a good ap- 
pearance, the Federal Government proposed to finance these par- 
ticular subsidies over a long period of time so that the current 
budget would reflect minimum expenditures. The Administration 
would have nothing to do with the Murray-Metcalf Bill or a 1960 
Senate bill that would help education attain minimum standards. 
In 1959 Secretary Flemming of HEW admitted quite candidly that 
the President would not propose or accept an education bill be- 
cause of the importance of balancing the budget. 10 In this process 
of accepting only welfare programs that would not put any great 
strain on the budget, the administration made no- attempt to dis- 
tinguish investments from ordinary expenditures. 

As we have seen, President Eisenhower was strong on promises 
on welfare programs. But it is quite clear from the results that he 
would not spend large sums of money. This is a second principle: he 
would expend for welfare but only where the costs were low. In this 
connection consider, for example, trying to solve the higher-educa- 
tion problem, brought to the attention of every American by Sput- 
nik, by appropriating a total sum of $900 million over a period of 
four years. According to the best estimates we can make, colleges 
will need $7 billion additional annually within ten or twelve years, 
as compared to about $4 billion available now. Yet President Eisen- 
hower proposed a program of about $200 million a year, and when 



250 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

he was confronted by Senate 57 in 1959, which proposed to make 
available about $50 million for academic buildings — not grants, 
mind you, but loans — the President objected. 

A third principle of the Republican administration was not to 
follow up any suggestions in any very effective way. This was 
clearly evident in the votes on construction subsidies for public 
schools, as it was also for the failure to have funds appropriated 
for the flood insurance program. 

A fourth principle was that when money is appropriated, it 
should be spent as slowly and grudgingly as possible. Robert Moses, 
the Housing Redevelopment expert in the State of New York, a 
member of the Republican party, said publicly that never in all the 
years that he had worked with the Federal Government had he 
seen so many obstacles put in the way of a program as the Wash- 
ington authorities have put in the way of the Urban Redevelopment 
Expenditures. 

A fifth principle is: let private enterprise do it wherever possible, 
even if the results are not quite so good. This was dramatically 
illustrated in the Salk vaccine experience. Here, the Secretary of 
Health, Education and Welfare, Secretary Hobby, insisted that 
distribution should be undertaken by private interests. 

A sixth principle is reflected in a number of programs; namely, 
the policy of forcing others to go into debt and perhaps become 
bankrupt, rather than letting the Federal Government do it. In hous- 
ing, for example, programs were introduced which put great pres- 
sure on the public to mortgage their residences. 

A seventh principle is to depend as much as possible on insur- 
ance. Here the burden is put on the low-income group rather than 
on the general taxpayer. 

We suggest the following: one, that hereafter we distinguish 
between investments and spending; two, that we take into account 
the growth of the economy and try to tie programs to that growth; 
three, that we consider the budget a tool of economic life rather 
than an end in itself. 



26. The old 



Contrast of Views 

The Eisenhower administration on the whole supported the Old 
Age Insurance Program and even its extension and liberalization of 
benefits. An effort was made, as it had been in 1950 and 1952, to 
adapt benefits to rising prices and incomes in 1954, 1956 and 1958, 
though not with the full support of Republicans in Congress. 

But on a number of crucial issues the Republicans are still far 
behind the Democrats. For example, on the 1956 amendments to 
the Old Age and Survivors Insurance (OASI) program, the Demo- 
crats voted 41 to 3 for the bill and the Republicans only 21 to 18 
in favor. The administration and the Republican members of Con- 
gress fought the introduction of disability benefits for those aged 
fifty and over: the Democrats voted 41 to 7 in favor, the Republi- 
cans 38 to 6 against. 1 

In signing the bill and referring to the disability provisions, 
President Eisenhower said: "We are loading on the social security 
system something I don't think should be there, and if it is going to 
be handled, should be handled in another way." 2 

Even in signing a 1958 bill, which in general he approved, the 
President said: "Increases in the proportion of the public assistance 
programs which are financed by the Federal Government can lead 
only to a weakening of the responsibility of the states and com- 
munities." 3 

In his budget for 1960, the President reverted to his doubts on 
the trends in the Social Security Program. He insisted, "The Fed- 
eral Government's responsibility for income maintenance should be 
mainly discharged through contributory, self-supporting social se- 
curity." 

251 



252 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

President Eisenhower was also disturbed by the increased pro- 
portion of public-assistance grants financed by the Federal Gov- 
ernment. In 1946, of total outlays of $446 million, the Federal Gov- 
ernment's share was 44 per cent; by 1960 the Federal Government's 
share would be 57 per cent of $2,018 million. Legislation to raise 
the federal maximum share and extend the federal participation to 
new groups, he complained, had been enacted five times in the last 
six Congresses. 4 

... I believe that this trend is inconsistent with the American sys- 
tem of Government. If it continues the control of these programs will 
shift from our state and local governments to the Federal Government. 
We must keep the financing control of these programs as close as we 
possibly can to the people who pay the necessary taxes and see them 
in daily operation." 5 

On the issue of insurance versus tax burdens, the Eisenhower 
administration tended to favor insurance against government ex- 
penditures for welfare services. Indeed, the Democrats also moved 
in this direction. But on the whole the Republicans are more en- 
thusiastically in favor of this approach. Furthermore, the Eisen- 
hower administration was inclined to increase tax rates as they 
liberalize benefits at a more rapid rate, than earlier administrations 
were. They therefore reverted to a policy of very substantial re- 
serves, a policy that was largely repudiated in the 1930's. 

It is of some interest that in the treatment of the Civil Service 
Retirement Fund, the Eisenhower administration increasingly sup- 
ported a pay-as-you-go program and did not credit the Civil Service 
Retirement Fund with all its earnings. But in dealing with OASDI, 
it took an entirely different line: namely, one of building up large 
reserves for the future and, therefore, currently increasing taxes 
to a greater extent. In the former case, of course, the failure to 
appropriate gives the budget a much better appearance. In the 
latter case, increase of taxes and accumulation of reserves do not 
reflect adversely in the budget. Payroll taxes have risen at an accel- 
erated rate in recent years. 

In the late 1950's there was much agitation for hospital insur- 
ance for the old, a movement spearheaded by Congressman Forand 
and embodied in his H.R. 4700. The American Medical Association 
fought this bill through strong lobbies and pressures on physicians 
of Congressmen, and in 1959 the Eisenhower administration also 



The old 253 

announced its opposition. The argument of the administration ap- 
parently was that the introduction of hospital insurance would 
weaken the development of general insurance. What the Forand 
Bill proposed to do was to provide insurance for the old under 
OASDI, a program that could be financed from an additional tax of 
y 2 to 1 per cent of payroll. 

It is difficult to understand why Eisenhower in 1959 and 1960 
opposed this program. The facts are that in general only one-half of 
the old — that is, those over sixty-five — are covered by insurance, as 
compared to the rest of the population; yet this group has twice as 
much need for hospital care. 7 

In general, then, the Eisenhower Administration's position on 
taking care of the old is a great advance over that taken by the 
Republican party in the 1930's. But, as in many other programs, 
this government was determined to put as much of the cost as pos- 
sible on the already heavily burdened state and local governments, 
and as little of the cost as possible on the relatively high-income 
groups through general taxation. 

Governor Stevenson in the 1956 campaign urged a more gener- 
ous treatment of the old. He would insist upon the maintenance of 
their accustomed standards of living; he would provide hospital 
insurance for the old, would improve our general health insurance 
programs to protect the old as well as others, would also overhaul 
and completely adjust the benefits programs under Old Age, Sur- 
vivors and Disability Insurance, and not tie them to the cost of 
living but to the general standard of the American people, would 
not penalize the old for working if they were entitled to benefits, 
and would help stop the prejudicial treatment of older members 
of our society on the labor market. 8 

Some Unresolved Problems 

There is no tougher problem than that of the economic and 
physical status of the old. In 1900 there were 3 million persons, 4 
per cent of the population, aged sixty-five and over; in 1950, 12% 
million, or 8 per cent; by 1975 the estimate is 21 million, or 11 per 
cent. 9 

When one views the percentage of dependents to total popula- 
tion and especially when one considers the total income by 1975, 
then surely adequate provision can be made for the old. In fact, 
with the great fears of automation and rising productivity, there is 



254 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

much to be said for sustaining demand through adequate provision 
for the old. 

The economic problems of the old arise in part because their 
numbers are increasing; in part because their incomes are inade- 
quate to provide for their needs; in part (and related) because 
the labor market is so constituted that they are discarded altogether 
too soon; and in part because provision for them through govern- 
ment raises difficult and not easily comprehended financial prob- 
lems. 10 

Benefit payments are small in view of the need of funds to sup- 
port a family beyond age sixty-five. These benefits are not adequate 
in part because even today only $4,800 of the total income of a 
worker is subject to the payroll tax, and hence contributions are 
needlessly reduced. When the act was introduced in 1935 the 
maximum was $3,000. Yet in the same period average wages have 
trebled. In other words, on the basis of the 1935 allowance, $9,000 
should be covered. The exclusion of a substantial part of the wage 
bill means that benefits are therefore kept down and particularly 
for the lower-income groups, since on the whole they are favored 
in that they receive a large proportion of the benefits in relation to 
what they pay in. 11 

Conclusion 

In the years before 1952, Republican policy was against the 
advances in old age Social Security. After 1952, they accepted the 
inevitable, and the President helped scotch a campaign spearheaded 
by Congressman Curtis and Secretary Humphrey to destroy OASI 
and substitute a modest universal pension. Under the Eisenhower 
administration, coverage was extended and benefits liberalized. 
But the administration was less inclined to move ahead than the 
Democrats in Congress. And the administration, with its determina- 
tion to put increased burdens on state and local government and to 
spare the taxpayer, tended to depend too much on reserve accumula- 
tion and to slow up the liberalization of benefits. 

Among the needed advances are partial financing by the general 
taxpayer, payroll taxes levied on maximum pay of $7,000 to $9,000 
instead of the current maximum of $4,800, an increase of average 
benefits of at least 50 per cent now and 100 per cent within ten 
years and escalator clauses to protect the old from the effects of a 
creeping inflation. 12 



The old 255 

In the next few years the additional needs can be financed out 
of reserves, a higher maximum payroll subject to payroll tax, and 
a gradual increase in the contribution of the taxpayer. The Congress 
should also give the administration discretion to adjust tax rates to 
varying economic conditions. 



27. Federal aid for education 



The Crisis in Education 

Why, in view of vast flow of goods and services, should there be 
so much trouble in siphoning off adequate amounts for public 
school education? The answer is that the problem is a financial one, 
not one of inadequacy of real resources. By that I mean the output 
of the nation is more than adequate to yield needed resources for 
education. Our trouble comes from the inadequacies of our finan- 
cial machinery in diverting enough dollars to education for the 
purchase of manpower, buildings, supplies and so on. Somehow we 
must spend more of our wealth for education. These dollars will 
build classrooms and pay salaries and lay the necessary foundations 
for qualitative improvement in our educational system. 

The reasons for classroom shortage are the failure to build 
during the war and depression periods, the large rise in school 
population and the shifts of population. As a result of the shifts, 
"in some places there are high concentrations of children with not 
enough classrooms and in other places school buildings are stand- 
ing half empty because much of the school population which they 
served has moved elsewhere." 1 

One of the troubles is the difficulty of getting accurate figures of 
shortages of classrooms. Secretary Hobby had a way of reducing 
her estimates as the crisis became more severe. For the fall of 1955 
we had as many as five different estimates ranging from more than 
200,000 to 340,000 classrooms needed. At one time the estimate 
of shortages was as high as 600,000. In 1960, Budget Director Mau- 
rice Stans, annoyed by what he considered the high estimates of 
classroom shortages of his Office of Education, proceeded to pre- 
pare estimates of his own. 
256 



Federal aid for education 257 

Another problem in public school education is the low salaries 
of teachers. In view of the increased demand for teachers with the 
school-age population rising by about a million or more per year, 
it is very important that schoolteachers be paid adequately. At 
one point teachers with an average schooling of 15% years earned 
a salary of $3,725, whereas the average worker with a schooling of 
nine-plus years received $3,590 per year and the average factory 
worker $4,051; civilian employees in the Federal Government were 
paid $4,103, dentists $8,500, lawyers $9,500, and physicians $15,000. 2 
Indeed, by 1960 this lag had been largely made up, but the pay was 
still inadequate if we are to get the additional teachers of high 
quality that are needed. In higher education there is still a sub- 
stantial lag of teachers' salaries in relation to the rise of pay of the 
nation's workers. 

In part the difficulty in educational finance stems from the fact 
that the Federal Government has arrogated to itself increasingly 
the most productive sources of revenue; and yet 97 per cent of the 
responsibility for financing public school education lies with state 
and local governments, which raise only about one-third of all the 
revenue. Inflation has also hit the public school system severely. For 
with inflation, state and local government revenues respond slowly, 
though costs rise greatly. The response of revenues from the general 
property tax during inflation is especially inadequate, and the gen- 
eral property tax is still the major source of revenue for school 
finance. The tax that has been appropriate and adequate as the 
major source of revenue for 50 or 100 years is no longer sufficiently 
productive in an age when income is not closely tied to property. 

The best estimate we have is that the annual public school bill 
is likely to rise by about $11 billion within ten years. In view of the 
large rise of expenditures by state and local governments and of 
debt, it is difficult to find out where these additional $11 billion are 
to come from and especially if the state and local governments would 
have to finance $2 or $3 billion additional for higher education. In 
fact, these additional outlays for education would absorb in the 
absence of any inflation a major share of increased revenues that 
may be expected by state and local governments in the next ten 
years. 

The increased burden of public school education, the arrogation 
of productive revenues by the Federal Government, varying capaci- 
ties of different states, the present unhealthy condition of state and 



258 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

local finances, the tendency of the Federal Government to distort the 
spending pattern of the states through their grant and aid system, 
the inflationary effects for which the Federal Government is in part 
responsible — all of these are reasons for some federal intervention 
in this field. With the large migrations the inadequate education 
system of one state is felt in other states. Through its grant and aid 
program, the states are encouraged to spend more money on Social 
Security, relief, and highways, and the like, and less money on 
education, where the Federal Government does not make a sub- 
stantial contribution. Where federal matching grants are available, 
state governments tend to spend disproportionately. 3 

The Eisenhower Program in Education 

President Eisenhower learned from Herbert Hoover the best 
of delaying tactics: appointing a committee as a substitute for ac- 
tion. Early in 1954, President Eisenhower announced his plans for 
a White House Conference on Education. The committee reported 
two years later, in the main disapproving of federal aid though 
prepared to accept emergency construction aid on the condition 
that state and local governments increase their efforts. 4 In general, 
the President's program for help on construction was similar to the 
later recommendations of the Conference. But this did not commit 
the President to following through on his proposals. Later he ap- 
pointed the Josephs Committee (Education Beyond the High 
School). That committee proposed construction aid from the Fed- 
eral Government. But the President remained silent on that issue, 
or fought an adequate program. 

From the very beginning, even as early as 1785, before the 
Constitution was approved, interest was expressed in help to the 
states and localities for education. In George Washington's words: 
"In proportion as a government gives forth to public opinion, it is 
essential that public opinion shall be enlightened." 

In Jefferson's words : "If a people expect to be both ignorant and 
free, they expect what never was and never will be." 

In education, President Eisenhower seemed to hold less ad- 
vanced views than ex-President Hoover and Senator Taft. For ex- 
ample, President Hoover had said: "Although education is primarily 
a responsibility of the states and local communities and rightly so, 
yet the nation as a whole is rightly concerned in its development 



Federal aid for education 259 

everywhere to the highest standards and to complete universal- 
ity. . . " 5 

Senator Taft, in supporting a bill for federal aid to education in 
1947, presented a strong case for federal subsidies to cover the 
general needs of the public schools. Indeed, he would require some 
minimum effort on the part of state and local government, but he 
said: 

. . . We cannot preserve the Republic at all unless the people are 
taught to read and to think so that they may understand its basic prin- 
ciples and the application of such principles to current problems. . . . 
No man can have equality of opportunity if he has not the knowledge to 
understand how to use the rights which are conferred upon him. . . . 

. . . While money is not the only requirement of a good school 
system, as so many of our writers on public school education seem to 
think, it is certainly an essential one. . . . 

. . . But I believe very strongly that the Federal Government has a 
proper function in the field [education for children]. . . . 6 

President Eisenhower, indeed, had promised much for the chil- 
dren, insisting upon equality of opportunity. But in 1953 and in 
1954 he did nothing. That despite the fact that the Senate Labor 
and Public Welfare Committee had reported a bill to aid public 
education. 

In 1955, Mrs. Hobby, Secretary of Health, Education and Wel- 
fare, under great pressure finally presented a bill for aiding the 
public schools. According to Secretary Hobby, the bill would "put 
$7 billion to work building classrooms during the next three years 
. . . Senate 968 would, we believe, preserve in fact the tradition of 
state and local responsibilities for education." 7 

This bill provided that the Federal Government would provide 
$750 million for purchases of federal bonds, where local govern- 
ments could not otherwise float securities, at a rate of y 2 of 1 per 
cent above that on Federal Government bonds. This legislation, of 
course, would have the effect of forcing local school districts into 
debt, a favored policy of the Eisenhower administration. Under 
Title 2 the state building authorities would have built school build- 
ings for local school authorities: a rather dubious proposal, first 
because only four states had state school building agencies and 
much time would be required to set up new agencies. Again, the 



260 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

proposal was really one for getting around constitutional debt 
limits and hence of doubtful constitutionality. I am afraid it is 
difficult to understand how the provision of a reserve of $300 mil- 
lion, apparently equal to one year of interest payments to be 
shared by federal and state governments, was to make possible 
a sale of $6 billion of state agency bonds. Instead of a $7 billion pro- 
gram as advertised, this was actually a $200 million federal grant 
program and $900 million of loans to be repaid with interest. Here 
was an attempt on the part of the government to put up $200 million 
in direct grants to solve a $5 billion problem. 

This was a program that appealed to bankers but not to the 
school authorities. Edgar Fuller, Executive Director of the Council 
of Chief State School Officers, before the Senate Labor Committee, 
on February 18, 1955, complained that the program of rental pay- 
ments would mean much higher cost for schools than the usual 
financing. 

Education Commissioner Brownell said in evidence before the 
Senate Labor Committee on February 16, 1955: "We called on the 
bonding people more extensively than we did on the group from 
the field of education. . . . We obviously relied upon bond con- 
sultants." The school authorities much preferred Democratic bills 
sponsored by Senator Hill that would provide over $1 billion in 
grants over two years for construction programs. 

Secretary Hobby had made her position quite clear in 1954 when 
the construction program was under consideration by the Senate 
Labor and Welfare Committee: 

Federal expenditures on such a scale would have serious conse- 
quences under present budgetary position of the Federal Government 
. . . would inevitably be accompanied by pressures for federal interfer- 
ence and the control and direction of education itself . . . tends to 
undermine . . . the principle . . . that the control and direction of 
public education is a local and a state, rather than a federal, responsibil- 
ity. 8 

Finally, in 1956 and 1957 the President proposed federal sub- 
sidies for school construction. Of course, 1956 was an election year 
and the Democrats made no secret of their belief that the President 
had changed his views because of the political situation. As against 
Mrs. Hobby's statement of 1955 that only a few school districts 
needed outside help, President Eisenhower said in his school pro- 



Federal aid for education 261 

gram message in early 1956: ". . . Many communities simply do not 
have available locally the resources needed to cope both with the 
legacy of shortages from the past years and with future needs. 
Unless these communities get help, they simply cannot provide 
enough good schools. . . ." 

At a press conference on February 9, 1955, Eisenhower had said 
federal money could damage the school program. But in 1956 he 
said: ". . . Our history has demonstrated that the Federal Govern- 
ment, in the interest of the whole people, can and should help 
with certain problems of nationwide scope, when states and com- 
munities — acting independently — cannot solve the full problem or 
solve it rapidly enough. . . ." 9 

In 1956 the Democrats presented the Kelley Bill, which had 
marked similarities to the Eisenhower Bill. The Kelley Bill would 
provide $400 million a year in direct aid for four years, while the 
Eisenhower Bill provided $250 million a year for five years. The 
Eisenhower Bill, in my opinion, had the advantage of tying allot- 
ments to economic capacity more than the Kelley Bill did, and also 
requiring minimum effort by the districts and states as a condition 
for aid. 

But the President showed little interest in the bill after he had 
made his initial speech. The Powell Amendment, which tied the 
program to the integration issue, was accepted by a vote of 148 
Republicans and 77 Democrats, whereas 46 Republicans and 146 
Democrats voted against the Powell Amendment. In the final vote 
on the Kelley Bill, which included the Powell Amendment, 105 
Democrats and 119 Republicans voted against, and 119 Democrats 
and 75 Republicans in favor. Many of the Republicans had voted 
for the Powell Amendment in order to kill the bill. Once they had 
the Powell Amendment inserted in the bill, they then voted against 
it. No less than 94 Republicans voted for the Powell Amendment 
and against the bill, as The New York Times said, ". . . thus raising 
some real questions as to the reasons for their vote. . . . The failure 
of the administration to put up a real fight for even its own educa- 
tion bill during the crucial voting week is another point against 
Republicans. . . ." 10 In 1957 it was the same story. This time it was 
a Republican Congressman who introduced an integration amend- 
ment. But the bill was defeated without any strong effort by the 
President to push it through. 

It is, therefore, not surprising that Marquis Childs concludes: 



262 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

. . . The Secretary of Health, Education and Welfare, Marion Fol- 
som, was determined to do everything possible to see to it that Congress 
adopted a reasonable aid [education] program. The President on several 
occasions spoke the right words in favor of the proposal put forward by 
Folsom. But, as in the past, when it came down to the practical business 
of using the political tools that other Presidents had employed, he 
simply withdrew . . . most Republicans voted against what the Presi- 
dent had said he wanted. Apart from the very real efforts of Secretary 
Folsom, the whole matter had been handled with such a lack of convic- 
tion and earnestness as to leave a strong suspicion that the President had 
been doubtful that a federal aid bill was really necessary or desirable. 11 

In higher education the record of the administration was not 
much better. It is true that the Sputnik finally aroused the adminis- 
tration to present a program. But the result — a program of $900 mil- 
lion to be spent over a period of four years — was inadequate. More- 
over, administrative discretion has resulted in expenditures moving 
ahead at an even slower rate. The Eisenhower administration had 
supported construction loans for colleges. But in 1959 the President 
would cut the additional amount provided from $300 to $200 million 
and was adamant against any loans for academic buildings. In 1960 
he would abandon the college housing loan program. Unless addi- 
tional resources are found beyond those that can be anticipated, 
the net result will be very high tuition and severe burdens on state 
and local governments and the exclusion of many students who 
might otherwise have been able to go to college, or a serious reduc- 
tion in quality of higher education. It is indeed true that a radical 
change in financing methods might ease the situation, but this will 
take time. 12 

Conclusion 

Again, it is the same old story. First, promises to do something 
in a substantial way; then, under great pressure, a slight program 
with little or no follow-through. Thus Mrs. Hobby proposed to solve 
a $7 billion problem by the expenditure of a few hundred million 
and an unworkable financing program. Again, the responsibility of 
local and state governments is invoked as an excuse for inaction on 
the part of the Federal Government. 13 In election years, the ad- 
ministration made some concessions, but between elections it 
seemed essentially indifferent. The 1959 and 1960 programs would 
put a minimum burden on the budget. It is no wonder that Governor 



Federal aid for education 263 

Stevenson in his speech before the National Education Association 
on July 6, 1955, said about the President: ". . . 'We need,' he said, 
'seven billion dollars' worth of new schools.' But to help get them, 
he recommended that Congress pass not a law but a miracle. For 
meeting this seven billion dollar need, the President proposed 
grants of $66 million a year for three years. This is 33 cents a year 
to meet every $35 of admitted present crying need." 



28. Medicine 



}0, A Hoover Staff Committee wrote as follows : "Three-legged stools 
used to be common. Now, we prefer four-legged chairs. Food, 
clothing and housing used to be the three necessities of life. Now, 
life rests more solidly on four necessities — food, clothing, housing 
and health services. Medical science by its concern for protecting 
and enhancing life, and by its proven dependability in so doing is 
making medical care something that everyone needs." x 

The objectives of policy in medicine should be to improve the 
distribution of medical services and to make these services available 
to all at a minimum cost, which means ( 1 ) getting more money into 
medicine, ( 2 ) offsetting the rise of spending with increased person- 
nel and facilities and (3) spreading the cost as widely as possible 
at one time and over time. 

The Rise in Medical Outlays Has Been Disappointing 

Why more money into medicine? One reason is that the public 
does not increase its outlays on medicine as much as might be 
expected at our rising standard of living. It may be said at the outset 
that one reason for this failure is the uncertainty about medical 
need and the unavailability of adequate financing methods. For 
example, with a rise in gross national product of almost 100 per 
cent from 1929 to 1953, the rise in medical care outlays in current 
dollars was but 90 per cent that of gross national product and 108 
per cent of all consumption outlays. 2 

Public Expenditures on Medicine 

One problem for the Eisenhower administration was the large 
rise in public expenditures on medicine. In fact, much of the case 
264 



Medicine 265 

for extension of insurance programs in medicine is based on the 
theory that such programs would cut the demands being made on 
government for medical services. Yet the Administration did not 
realize that some help in extending medical private insurance would 
be largely compensated by savings on public outlays. 3 

More Money for Medicine 

An argument for increased outlays for medicine lies in the net 
savings accomplished by lives prolonged, income produced and taxes 
received. In 1948 the Federal Security Administration estimated 
that "every year 325,000 people die whom we have the knowledge 
and the skills to save. Every year, the nation loses 4.3 million man- 
years of work through bad health. Every year, the nation loses $27 
billion in national wealth through sickness, and partial and total 
disability." In all, the administration estimated total avoidable losses 
at $27 billion plus $11 billion lost earning power because of pre- 
mature deaths. 4 It is certainly not unreasonable to contend that 
the net effect of a few additional billion dollars injected into the 
medical income stream at the right times and places would increase 
national income a multiple of the new outlays. 

In The New York Times of August 22, 1954, a leading expert on 
medicine, Dr. Howard A. Rusk, put the matter succintly: 

In taking this action [increased funds for medical research], Congress 
was impressed by some simple but startling facts, convincing it that 
medical research paid off in both lives and dollars. 

Between 1944 and 1952, medical research and improved medical 
education have reduced the death rates from all causes by 9.4 per cent. 
Five full years have been added to the average life expectancy. 5 

In his health message of 1954, the President commented on the 
claims of cancer of 25 million deaths of our present 160 millions, of 
817,000 deaths annually from heart disease and disease of the blood 
vessels and so on. He added that "intensified research has produced 
more knowledge than ever before about the scourges of heart dis- 
ease and cancer." Yet the President recommended only $74 million 
for medical research in five key programs, or one-half of what was 
proposed by his Professional Advisory Councils. 

Congress in particular was very much impressed by the large 
losses resulting from premature deaths and illness. In proposing that 
the governments put up a program of $500 million to deal with 



266 }0L THE ECONOMICS OF THE POLITICAL PARTIES 

cancer, Senator Neuberger said: "Americans spend annually $15 
billion on liquor and tobacco. They pay $27 billion for automobiles. 
They spend $3.2 billion for TV and radio sets. For cancer research 
the government puts up only $56 million. Consider that 2% times 
as many people died of cancer during World War II as were slain 
in action on all our world-wide battlefronts." 6 

It is possible to leave the spending pattern exclusively to the 
free market. Then there is likely to be underspending for education, 
health and similar services. Hence, in order to obtain an improved 
pattern of spending the government either spends tax money or, 
through various policies, tends to stimulate outlays in areas where 
spending is deficient. In Great Britain, for example, the choice has 
been to increase outlays on medicine through heavy taxes on tobacco 
and alcohol. 7 

More Outlays on Medicine and Insurance 

One of the most effective ways of pouring more money into 
medicine is through prepayment insurance. The advantage of in- 
surance lies in the fact that, through small payments made peri- 
odically by many, the large needs of a relatively small number can 
be paid for at particular times with a minimum cost to all. It is 
unfortunate that the campaign in the late 1940's to introduce a 
national program of health insurance was stopped largely by the 
American Medical Association, with the support of large numbers of 
conservative Congressmen. In many ways national health insurance 
would be the most effective and perhaps the cheapest way to 
achieve our major objectives in the field of medical care. Yet in 
recent years the Federal Government has done virtually nothing to 
meet the need for insurance for medical purposes. 8 

One of the difficulties with current insurance is that the coverage 
of benefits is not adequate; a second, that many (in particular the 
relatively poor and old) are not covered; 9 a third, that the exist- 
ence of insurance tends to bring about higher charges than are 
otherwise justified. A doctor tends to charge more if he knows that 
the patient is insured. 

Matching Additional Spending with an Increased Flow of 
Resources 

It does little good to pour more money into areas of medicine 
when there are serious bottlenecks. Spending unaccompanied by 



Medicine 267 

expansion of facilities and an increase of manpower can result in 
inflation of costs, not more services. 

Pumping more money into the medical field is not in itself an 
adequate solution to our problems. The country is short of physi- 
cians and they are badly distributed. Despite the vast gains of in- 
come, the resultant increased medical needs, the gradual aging of 
the population, all of which put a real burden on the medical pro- 
fession, the number of physicians relative to population has tended 
to decline. The only offset to these rising needs is a rise of pro- 
ductivity and increased mobility of physicians. The increased com- 
plexity of medicine adds further to the needs of personnel. A 
dispatch of November 1, 1959, in The New York Times gives the 
recommendations of an expert committee to the Surgeon General: 
in order to maintain the current ratio of physicians to population, 
the annual output of physicians will have to increase from the 
current level of 7,400 to 11,000 by 1975. The committee proposed 
a billion-dollar program over ten years for training in medicine, 
half to be financed by the Federal Government. 

In the light of this shortage of doctors, the Eisenhower adminis- 
tration took inadequate measures to help the medical schools finance 
themselves and provide additional resources. I shall say more on 
this later. 10 

A shortage of hospitals is suggested by the large increase in 
outlays and the cost of hospital service. For example, from 1935 to 
1952 there was a rise in the cost of hospitals — total expenditures on 
nonfederal general hospital services — from $439 million to $2,718 
million. In a more recent period the total expenditures rose from 
$1,859 million in 1948 to $4,395 million in 1957, or an increase of 
1% times in these nine years. This compares with an increase in 
total medical outlays, exclusive of hospitals, of about 80 per cent. 
There are all kinds of explanations for this tremendous increase. 
The general inflation, the rise of population, the greater use of 
hospitals, in turn related to a considerable degree to the spread 
of prepayment plans, increased services, and surely the general 
rise in real income must have contributed greatly to the higher 
outlays. The Commission for Financing Hospital Care in the United 
States notes that once an allowance is made for general inflation 
and the rise of admissions (in seventeen years a cut of 32 per cent 
in the average stay ) , then the rise of expenditures per admission is 
only 20 per cent. 11 



268 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

Under the Hospital Survey and Construction Act of 1946, the 
Federal Government provided subsidies for the construction of hos- 
pitals. 12 New hospitals are not being built rapidly enough. The 
backlog is probably larger than ever. 13 

Writing in The New York Times, on February 1, 1959, Dr. 
Howard Rusk had this to say: 

Grants for hospital construction during the next fiscal year will be 
reduced from $186,200,000 to $101,200,000, and grants for construction 
of health research facilities from $30 million to $20 million. 

It is significant that in these proposed reductions in federal grants for 
the construction of hospitals and health research facilities, there is no 
discussion of a national need for such programs. Rationale of the pro- 
posed reduction is that they are "in accord with a government-wide 
policy to defer federal construction and decrease support of non-federal 
construction." 

Once again, budgetary considerations were given precedence 
over public needs. 

Insurance and Improved Distribution 

A fundamental objective of medical economics is an improved 
distribution of medical care. In the absence of special measures the 
well-to-do obtain a disproportionate part of medical services. When 
there is excess capacity, the gains of the high-income groups are 
not at the expense of others, but when, as is likely in high-employ- 
ment economies, there are serious bottlenecks (for example, in 
hospitals, nursing services, time of specialists), then the wealthy 
tend to obtain an excessive share of services. 

The Commission on Financing Hospital Care had a number 
of interesting suggestions to deal with the problem of poor distribu- 
tion, including the recommendation that "necessary hospital care 
should be obtainable by all persons without regard to their ability 
to purchase it." Though the responsibility is primarily a private 
one, the Commission recognizes the responsibilities of private, com- 
munity, state, and federal agencies. The Commission recommends 
further extension and experimentation by prepayment groups. 14 

The Commission made numerous sensible recommendations for 
meeting the problem of medical aid for the indigent. Among the 
important ones are federal matching grants (with state and local 
control) to cover hospital bills of the indigent through financing 



Medicine 269 

prepayment insurance or, when this is not practical, through direct 
variable grants by the Federal Government; the coverage of workers 
during unemployment without payments of contributions and also 
coverage of prepaid hospital benefits under Unemployment Com- 
pensation; the inclusion of hospital provisions in OASDI and private 
pension plans for hospital treatment of the aged and permanently 
disabled. 

The Eisenhower Program in Medicine 

An indication of the differences in policy between Republicans 
and Democrats is given by the platforms of 1956. It should be 
noted that even the Democrats did not advocate a public insurance 
program and that the Republicans made it quite clear that they 
were against public insurance. In 1960, however, compulsory insur- 
ance (for example, the Forand Bill) was on the Democratic agenda: 

We pledge . . . support for the campaign that modern medicine is 
waging against mental illness, cancer, heart disease . . . we advocate 
federal aid for medical education to help overcome the growing shortage 
of . . . trained health personnel . . . but we pledge support to the 
federal aid to hospital construction . . . increased federal aid for most 
public health through preventive programs and health services . . . we 
also advocate an . . . attack on the heavy financial hazard of serious 
illness. . . . 

And here is the Republican statement: 

We recognize that the health of our people as well as their proper 
medical care cannot be maintained if subject to federal bureaucratic 
dictation. There should be a just division of responsibility between gov- 
ernment, the physician, voluntary hospital, and voluntary health insur- 
ance. We are opposed to federal compulsory health insurance . . . we 
shall support those health activities by government which stimulate the 
development of adequate hospital services without federal interference 
and local administration. . . . 

In general, the same charges can be made against Eisenhower's 
medical program that can be made against his other welfare pro- 
grams. His general objective seems to have been to proclaim virtu- 
ous objectives without spending the money necessary to achieve 
them. The reinsurance program and similar legislation introduced in 
1954 and again in 1955 is typical. Here Eisenhower proposed that 
the Federal Government put up $25 million to induce private 



270 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

companies to reinsure. For the $25 million the President claimed 
he could improve private health insurance generally, provide better 
protection for those now covered, and offer health insurance for 
added millions. This $25 million would achieve insurance against 
catastrophic illness, provide insurance in rural areas, and so on, and 
so forth. Perhaps the reinsurance program proved to be the biggest 
failure of all the programs supported by the President. Actually, 
according to all professional and expert advice, there were plenty 
of resources available for reinsurance not being used by insurance 
companies. The American Medical Association would not accept 
the program for one reason, and almost everybody else objected 
to it for other reasons. It was abandoned by both the right and the 
left. 

The reinsurance program is deceptive because it assumes that a 
$20-25 billion (inclusive of public) problem (the total costs of 
medicine) can be solved with a negligible investment by the Fed- 
eral Government. The theory behind reinsurance is that compre- 
hensive insurance would spread if the insurance companies could 
only insure themselves against risks. 

What can be accomplished by the introduction of a modest 
reinsurance fund? Costs, not risks, and the intractability of medical 
societies, which cut insurable benefits and coverage, are the major 
deterrents. The fundamental problem is not reinsurance but the 
inability of a large part of the population to pay for comprehensive 
insurance and the unwillingness of the medical societies to allow it. 
It is nonsense to assume that vital programs cost nothing. 

Congress rejected the reinsurance in 1954 and virtually did not 
consider it in 1955. This solution of the nation's health problem 
was scarcely consistent with the President's speech in Harrisburg 
when he said: "They [the Republicans] realize that this govern- 
ment, to be worthy of the United States, must be concerned for 
155 million people; the education of the young; the health of those 
who work, and their security; and security and comfort of those 
among us who are aged and cannot take care of themselves." 

Finally, as regards reinsurance, I could quote from a letter which 
I wrote to The New York Times on July 25, 1954. Here are some 
excerpts from this letter: 

Could Secretary Hobby have been quoted correctly in her recent 
press interview when she was reported to have said that this bill would 



Medicine 271 

make health insurance available to 65 million additional Americans? 
This is a most absurd and unsupportable claim, if made. 

How can anyone believe that a Government loan of $25 million is 
going to solve the problem of medical organization? ... Or that this 
loan will significantly improve private insurance plans that now pay 
out $1.5 billion yearly? Or provide insurance coverage for 85 per cent of 
medical bills not now covered by insurance, or even a substantial part of 
the 85 per cent? . . . 

I believe the explanation of excessive claims made for the Administra- 
tion's health reinsurance program lies partly in the Administration's anxi- 
ety to give the people what they want but at no cost to the Treasury. The 
costless approach has been popular the last two years; but what is worth 
doing is likely to involve monetary sacrifices. . . . 

One of the petty economies of the administration was the cut of 
funds for the Food and Drug Administration in 1954 and 1955. 
"Instead of maintaining this essential growth [1939 to 1951] and 
expansion in the funds of the Food and Drug Administration, to 
take into account the constantly expanding responsibilities of this 
agency in coping with expanded use of frozen and processed foods 
and so many new drugs and cosmetics, we saw the funds actually 
cut for two years in a row. ..." The result was a 15 per cent 
reduction in personnel and the curtailment of field travel by in- 
spectors. When complaints were registered, Secretary Hobby said 
she had under consideration a report of the work of the agency to 
see whether "it was just interfering with and persecuting and annoy- 
ing legitimate business." 15 

Congress was far ahead of the President in pushing expendi- 
tures for medical research, an unusual occurrence in budgetary 
matters. Even the Hoover Commission's report on research and 
development in the government recommended increased expendi- 
tures: "It should be noted that although Congress has created ap- 
propriations for medical research and development generously there 
are still many approved projects which have not been undertaken 
because of lack of funds. We therefore recommend that greater 
federal support be given to basic and medical research." 

It was also a long struggle to get some help for construction for 
medical facilities. Here leadership came from Congress and from a 
few members of the President's own party, and finally was accepted 
by the administration. Research was severely limited by lack of 
space and equipment. 



272 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

Dr. Bronk, President of the National Academy of Sciences, said: 
"We are training — in the great majority of institutions of our coun- 
try — future scientists with equipment which would be scorned 
by our industrial laboratories and in which these students will sub- 
sequently work." The National Institute of Mental Health, which 
was set up in 1946, complained it had not received one cent of re- 
search construction money from the government. 

Perhaps one of the greatest failures of the administration in all 
fields was the mess it made of the Salk polio vaccine. Dr. Francis had 
made his history-making report on the successful field trips on April 
12, 1955, but the administration was not prepared with any program 
for distribution and in fact had given the matter very little attention. 
Mrs. Hobby quite clearly believed that the distribution should be 
in the hands of private enterprise. She said that no one could have 
foreseen the tremendous demand for the vaccine. Roscoe Drummond 
wrote in the New York Herald Tribune on May 9, 1955: 

Because the Salk polio vaccine will remain in short supply for some 
time, it is evident that only the Federal Government can guarantee its 
actual distribution to the states. . . . 

Until supply of the Salk shots can catch up with demand, anything 
less than a federally policed distribution leaves much to chance and to 
wishful thinking when the parents of the nation deserve to know . . . 
that the government is not sitting back with its fingers crossed. 

In a criticism of Senate 2147, a Hill bill, which would make 
free vaccine available to all children, Mrs. Hobby said that S. 2147 
would lead to socialized medicine by the back door; and the repre- 
sentative of the American Medical Association opposed S. 2147 as 
completely unnecessary. Even as late as May 4, President Eisen- 
hower told the newsmen he favored voluntary distribution. Many 
had noted the fact that the Canadians were well prepared for the 
distribution of vaccine and that the vaccine was being sold in 
Canada at prices considerably less than in the American market, as 
well as the fact that some of the pharmaceutical companies had 
used their command of the vaccine to get doctors to purchase other 
items in tied sales. 16 

Throughout his whole administration, President Eisenhower 
showed little enthusiasm for substantial medical programs — and 
this despite the fact that he had been taken care of through most 
of his adult life by a system of "socialized medicine." He contributed 



Medicine 273 

nothing to the advance of insurance and tended to cut appropria- 
tions in many areas or to follow sluggishly the lead of Congress in 
these matters. In medical research Congress was far ahead. But 
in 1956 he did present a substantial program. Can the explanation 
be politics again, for as in other fields he was more alert to welfare 
needs in 1956 than in other years? In his message of January 26, 
1956, the President called for further advances in medicine. 

Congress approved most of the recommendations of the Presi- 
dent in 1956; in fact, Congress increased the request for medical 
research which the President made by $58 million, but it whittled 
down a $250 million construction program to a $90 million pro- 
gram. 17 

Conclusion 

The Republican record in medicine was poor. The greatest con- 
tribution at relatively small cost could have been had in pushing 
comprehensive private insurance. Here a small contribution by the 
government would have had large leverage on private outlays. But 
instead, what we were offered was a reinsurance program that had 
absolutely nothing to recommend it. Under pressure from Congress, 
the President increased outlays for research and construction. So 
strongly was the faith in the free market embedded in the adminis- 
tration that the HEW Secretary proposed even to allow the market 
to take care of the distribution of the Salk vaccine. So determined 
was the administration to cut expenditures that outlays for the Pure 
Food and Drug Administration and hospital construction were re- 
duced. The President contributed little to the expansion of outlays 
for medicine or to the resources that might match additional out- 
lays. Finally, in 1960 the Republicans in and out of government 
repudiated hospital insurance for the old under OASDI. 



29. Unemployment and 

disability insurance 



Introduction 

In order to help the reader understand this chapter, I shall begin 
with a discussion of the elements of our unemployment compensa- 
tion program introduced in the 1930's. The Federal Government 
requires a levy of 3 per cent (or less) on payrolls (in practice, 
generally on employers) to finance benefits for workers when un- 
employed. States that established programs acceptable to the Fed- 
eral Government can then apply the taxes to the financing of their 
programs. Actually the Federal Government does not establish 
minimum benefit standards, but does require that provision be made 
for experience (merit) rating, under which employers with favor- 
able unemployment experience are rewarded with reduced rates, 
even as low as in some states. 

Since standards are established by states, benefits vary greatly. 
Tax rates also differ because of the varying incidence of unemploy- 
ment and the interstate competition to reduce taxes (and hence 
benefits), a competition that is made possible by experience rating. 

In dealing with the problem of unemployment, President Eisen- 
hower was deeply influenced by a determination, related to Republi- 
can dogma, not to interfere with state and local activity and re- 
sponsibility. Thus, in defending the limited administration program 
for dealing with unemployment compensation in 1958 in the midst 
of a recession, Secretary of Labor Mitchell said: "The administration 
programs on H.R. 12065 were designed to fit in with existing state 
unemployment insurance systems without problems of adjustment. 
They would not disturb these systems in any way. . . ." * 

President Eisenhower often relied on exhortation to achieve a 
result. Right from the very beginning the President pleaded with the 
274 



Unemployment and disability insurance 275 

state administrations to liberalize unemployment benefits. He would 
increase the benefits to 50 per cent of wages and assure duration 
of benefits for twenty-six weeks. This message was repeated almost 
every year. Thus the President hoped to avoid any interference in 
the unemployment insurance programs. But exhortation was not 
enough. In 1952 the average weekly benefit for total unemployment 
was 33.0 per cent of the average weekly total wage. By 1957, the 
latest year for which figures are available, the percentage was still 
33.5 per cent. This is virtually no progress at all. 2 The improvement 
in duration of benefits was somewhat greater but not exciting. From 
1952 to 1960, average weekly payments for total unemployment rose 
by 48 per cent. This was slightly more, for example, than the gross 
weekly increase of 45 per cent in wages in manufacturing. 3 

Another Republican principle was an excessive trust in incen- 
tives. The viewpoint was well presented by Secretary Mitchell. It 
is widely held by economists that the system of merit rating, under 
which employers are allowed to reduce their payments for unem- 
ployment insurance in accordance with their employment record, is 
based on a fallacy, for the amount of unemployment of the average 
employer is determined only to a small degree by his own opera- 
tions, and primarily by the economic conditions, over which he 
has no control. In a debate with Secretary Mitchell, Senator Douglas 
pointed out this position effectively. Here is Secretary Mitchell's 
reply: "Certainly, for one, I believe that the merit system has a 
great deal of merit in that it provides an incentive to an employer 
or to an industry to so regulate his turnover and provide a reason- 
ably stable employment and therefore to get the advantage of 
the tax." 4 

Again, President Eisenhower would accept substantial amounts 
of unemployment rather than to take any measures that might jeop- 
ardize the balancing of the budget. This is a position that we have 
stated numerous times. Not only was he unwilling to support a 
serious area development program which ultimately might have 
saved the government considerable sums of money, but in 1958 he 
and his party were satisfied with a temporary unemployment loan 
program to help those who had exhausted their benefits, with a 
relatively small extension of their benefits, rather than taking this 
occasion to bring about serious improvements in the unemployment 
program. 

On this occasion Senator Kennedy, for himself, Senator Eugene 



276 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

McCarthy, and numerous other Senators, inclusive of a few Re- 
publicans, introduced S. 791 to provide for unemployment reinsur- 
ance grants to the states to revise, extend, and improve the un- 
employment insurance program, and for other purposes. 

But President Eisenhower had introduced an alternative bill, 
which was to cost the administration about $600 million, on the 
assumption that it would be acceptable to all states, which it was 
not. This was his major contribution for dealing with the results of 
the depression. Actually, a substitute bill, the Herlong amendment, 
was introduced into the House. It greatly weakened the administra- 
tion bill. In the Senate roll call, the Senate rejected Senator Ken- 
nedy's attempts to amend the program along the lines of his original 
proposals. On one vote 24 Democrats and 12 Republicans voted 
for liberalized benefits for the unemployed, and 14 Democrats and 
33 Republicans voted against. 5 The original Kennedy Bill, let us 
note, would have provided a minimum of 39 weeks' benefits and 
50 per cent of the individual's average weekly wage. 6 

What Is Wrong with the Unemployment Compensation 
Program? 

In theory, unemployment compensation (U.C.) was supposed 
to provide assistance for the unemployed worker over the period 
during which he would be seeking a new job. The period covered 
should, therefore, be adequate and the proportion of benefits to 
wages be high enough to cover minimum needs and yet not be so 
high as to discourage workers from seeking new employment. 

In many respects the program has failed to achieve these ob- 
jectives. Thus in two recent periods of mild unemployment, the 
benefits have covered but one-quarter of the cost of unemployment, 
the explanation being the large numbers still uncovered, the small 
benefit payments relative to wages, the exhaustion of benefits by 
many workers. 7 

Professor Richard Lester writes as follows: "A consequence of 
the low benefit levels and relatively short duration (plus restricted 
coverage and uncompensated waiting periods) has been that un- 
employment insurance has offset [or compensated for] less than 30 
per cent of the computed earnings lost from unemployment during 
postwar recessions." 8 

One reason for the disappointing results in unemployment com- 



Unemployment and disability insurance 277 

pensation is the gradual decline in the tax rates. In 1938, 1939 and 
1940, the average employer contribution rate was 2.75, 2.72 and 
2.69 per cent of the payroll. By 1954 this had been reduced to 1.12 
per cent and in 1957 it was 1.31 per cent. In 1939, 1952 and 1957, 
benefits to average weekly wages were 40.8, 33.7 and 34.8 per cent 
respectively. 9 

Experience (merit) rating has fundamentally changed the sys- 
tem of unemployment insurance. Not only has it reduced rates by 
about one-half on the average, as compared with the expected 
rate, but it has contributed greatly to the kind of interstate compe- 
tition that, through a federal scheme, the Federal Government was 
presumably to eliminate. 10 Because the burden of unemployment is 
put increasingly on the industries that suffer greatly from unem- 
ployment, as is required under experience rating, the effect is that 
the program has lost much of its insurance flavor; and in a manner, 
the unemployment compensation has further weakened the vulner- 
able (that is, high unemployment) industries. 11 

Experience rating tends to aggravate cyclical fluctuations. Un- 
der experience rating, taxes are cut in periods of high employment 
(favorable employment experience) and raised in periods of de- 
pression. Hence the contracyclical effects are greatly reduced. 12 
Rates should be reduced in periods of depression and raised in 
prosperous times. Possibly minimum rates of 1 per cent and maxi- 
mum rates of 5 per cent might be set over the cycle — with an aver- 
age of 3 per cent. Then the program might have a countercyclical 
effect. 

Benefits should be liberalized. One approach is for the Federal 
Government to set minimum standards. These standards need not 
necessarily be identical for different states. But (say) a duration of 
26 weeks, a waiting period of not more than 1 week, a minimum 
benefit of 50 per cent of wages, a ceiling on benefits of 80 per cent 
of wages, the elimination of certain disqualification provisions, addi- 
tional benefits for dependents, the use of an escalator clause where 
maximal benefits are set in dollars per week — these are suggested 
lines of improvement. 

In summary, the unemployment compensation program has been 
disappointing in its coverage, in the benefits offered, and in the 
encouragement of excessive competition among employers and states 
to keep taxes and benefits down. 



278 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

It is still possible to provide an unemployment compensation 
program with a reduced emphasis on experience rating, with a 
payroll tax averaging, say, 2-3 per cent over good and bad periods, 
and with minimum rates of l x / 2 per cent (to reduce excessive com- 
petition for industry), with allowances for dependents, with benefits 
equal to at least one half of wages for the average worker (and 
somewhat less for high-wage workers and more for the low-wage 
workers), with some automatic built-in adjusters to allow rise of 
benefits as prices and wages rise, with some improved standards 
of disqualification, and with federal loans and, under certain con- 
ditions, grants. Unless such measures are taken the workers' inter- 
est will increasingly be turned in the direction of other approaches. 
But President Eisenhower and his party have shown little interest 
in reform of unemployment compensation. 

Disability Insurance 

One of the striking features of the American Social Security 
System is the neglect of disability insurance, by which I mean pay- 
ment of benefits upon loss of income due to illness. In fact, since 
in order to collect unemployment insurance one has to be available 
for work, illness disqualifies a worker from obtaining unemployment 
insurance. Further, until recently under federal assistance programs, 
the Federal Government was not allowed to disburse for medical 
bills, and under Old Age Survivors and Disability Insurance 
(OASDI), an insured permanently disabled worker would watch 
his (her) insurance rights gradually disappear. The last follows 
because separation from the labor market would ultimately often 
disqualify a person from benefits. 

In 1956-1957 expenditures under four-state temporary disability 
insurance programs amounted to $257 million. Over a period of 
seventeen years, only four states have provided disability insurance, 
and no state has joined them for many years. 13 

Yet, despite world-wide acceptance, nothing has been done by 
the Federal Government to solve this problem. Here is a great 
opening for the new administration, and the Democrats have been 
remiss in not pushing this program more strenuously. 

My recommendation would be a program along the lines of un- 
employment compensation, with a 1 per cent federal tax on employ- 
ees, or shared by employers and employees, which could be ap- 



Unemployment and disability insurance 279 

propriated to finance state disability programs if the state introduces 
an adequate disability program. This seems to be the most effective 
method of obtaining close to universal coverage. 

Responsibilities of the Eisenhower Administration for 
Unemployment and Disability Insurance 

It must be quite clear now that our unemployment compensa- 
tion program is inadequate, and we really do not have a disability 
insurance program worthy of the name. Our unemployment com- 
pensation benefits are too low and too short-lived. Though initially 
introduced as a federal-state program, with the thought of eliminat- 
ing interstate competition, the program has tended to intensify 
interstate competition. The effect of merit rating has been to cut 
contributions and benefits and intensify interstate competition. 
Since the responsibility for financing was put on each state, the 
program did not contend with the problem of the uneven incidence 
of unemployment. In January, 1959, Michigan, for example, had 
reserves equal to 0.61 percentage of its 1958 benefits, whereas, for 
example, New Mexico had 7.61, Iowa 8.77 and many states in ex- 
cess of 3. Yet Michigan's average tax in 1958 was 2.3, as against 
a national average of 1.4. Though Michigan had little more than 1 
per cent of the nation's reserves, it had 5 per cent of the nation's 
income, a fact that suggests how hard it had been hit by the special 
problems of the automobile industry. The program should be to set 
minimum rates and benefits, thus restricting competition of states 
to reduce benefits. The government should also take seriously vari- 
ous proposals for a reinsurance fund, which would make it possible 
for states like Michigan, New Jersey, West Virginia and Rhode 
Island to get help from the national funds when their unemploy- 
ment is too heavy. Such a suggestion was made in the Kennedy 
Bill discussed above. 

The Republicans should not allow their fear of interference 
in state and local government to keep them from remedying mis- 
takes made in 1935, which have resulted in an unfair interstate 
competitive situation and also have prevented the unemployment 
compensation program from yielding the results that were antici- 
pated. 

In many other programs the Federal Government has failed to 
take into account the effects of interstate competition. Where the 



280 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

interstate competition becomes a serious deterrent to necessary 
welfare expenditures, then the Federal Government should take 
some leadership and become responsible for doling out the funds. 
Nor should the Republicans, with their great fear of budgetary 
imbalance, refuse to participate in a reinsurance program which 
reduces the burden upon the states heavily hit by unemployment. 



30. Housing and urban redevelopment 



^1 In recent years metropolitan areas have been growing rapidly 
and there has been an exodus to suburbia. Metropolitan areas of Los 
Angeles, San Francisco, Dallas and Washington, D.C., increased 
their population by more than 50 per cent between 1940 and 1950, 
and many other metropolitan areas have increased by 25 per cent 
or more. Since 1950, 84 metropolitan areas acquired around 14 
million new inhabitants, and by 1975, 50 to 70 millions more will 
be added, according to Dr. Raymond Vernon. 

The migration to the suburbs raises serious problems. In par- 
ticular, middle-income groups tend to move out, leaving behind in 
the central core low-income groups, and especially poverty-stricken 
ethnic minorities. Governments then attempt to deal with the prob- 
lem through urban redevelopment programs, primarily getting rid 
of the slums. But this also involves finding homes for those who are 
dispossessed. Transportation problems become more serious as the 
automobile makes its inroads, and railroads and metropolitan transit 
authorities find it difficult to balance their books. As people leave 
the large central core, the unit cost of services and taxes tends to 
increase. In suburban areas, on the other hand, the migrations are 
so heavy and so concentrated in a short period that necessary serv- 
ices are not to be had. 

In response to problems of this kind, the government in the 
1930's introduced legislation for reducing slums and providing pub- 
lic funds for improving the housing situation. But there has been 
much criticism of these policies. Many have agreed that the net 
effect of the housing program, for example, has been to provide 
riskless investments for bankers and builders and to provide rela- 

281 



282 ^t THE ECONOMICS OF THE POLITICAL PARTIES 

tively small help for the very-low-income, and even the middle- 
income groups. 1 

In the light of these needs and developments, what has been 
the attitude of the Republican administration? 

A House Committee on Banking and Currency early in 1956 
wrote: "The 'almost total lack of activity' in the program was due 
to the 'negative attitude and philosophy' of officials concerned." 2 
An indication of what was going to happen to the housing program 
is suggested by the 1959 budgetary figures. The annual average of 
expenditures for public housing in fiscal years 1950-1953 was $66 
million per year. From 1954 to 1959 (with estimates for 1958 and 
1959) there were net receipts of $57 million on the average. For 
other aids to housing in these last Democratic years the average 
figure was $425 million, and for the Eisenhower administration 
from 1954 to 1959, the average was $106 million. As noted earlier, 
housing outlays did not rise as much as gross national product or 
welfare outlays generally from 1952 to 1960. 

In his Budget of 1962, President Eisenhower said: ". . . the best 
results will be obtained by emphasizing leadership and financial 
participation by private industry and by local and state public 
agencies." The President proposed expenditures for community 
development and housing of $588 million in F.Y. 1962 as compared 
with $651 million in F.Y. 1961. The Kennedy administration gave 
this as one instance where President Eisenhower had underestimated 
the effects of Congressional action and intentions. President Kennedy 
in his Message on the Budget of March 24, 1961, criticized the Eisen- 
hower Budget for 1962 for omitting outlays for housing, and hence 
submitting housing estimates that were "completely contrary to our 
urban and economic needs. . . ." 

In Boston, on November 1, 1952, the Presidential candidate said: 
"We must have better housing for those Americans who are now 
forced to live in slums and substandard dwellings." 

But his first top housing official was ex-Representative A. M. 
Cole, who said: "It [Public Housing] tends to destroy private 
homes . . . private business . . . our form of government." This 
was a reference to slum clearing and low-rent housing. 3 In March, 
1953, Eisenhower cut the Democratic public housing program from 
75,000 to 35,000 units and while the GOP House killed the entire 
program, Eisenhower said nothing. In January, 1954, he continued 
his curtailment of housing programs. In a severe attack on the 



Housing and urban redevelopment 283 

Presidents housing goals, the Democratic Fact Book in 1956 (pp. 
42-43) showed that public housing in the last three Democratic 
years yielded 173,500 units as against 73,600 in the first three GOP 
years. In 1954, 76 per cent of the House Republicans voted to kill 
public housing outright. In 1955, a Democratic Senate passed a bill 
providing 135,000 units a year; but the opposition of 80 per cent 
of House Republicans, plus the threat of a Presidential veto of a 
larger housing bill, caused Congress to settle on 45,000 units. Senate 
Democrats voted 34 to 7 in favOr of the 135,000 units and the 
Republicans voted 7 to 31 against. 4 

Perhaps the largest disagreement came in 1959, when the Presi- 
dent's Budget for 1960 and the 1959 Housing Act were on the 
agenda. In his 1960 Budget the President proposed housing ex- 
penditures of less than $400 million, as against outlays of more 
than $1,200 million in 1959. 

Apparently the government was not going to put any more cash 
into the mortgage market in fiscal year I960. 5 A proposal of the 
Treasury to exchange government-owned mortgages for government 
bonds yielding substantially less raised a storm of protest. This 
would involve a large windfall for those holding government bonds 
generally priced far below par. It would also result in tax losses 
for the government. The procedure was also one of the usual ones 
taken by the government to give an impression of a better budget 
than actually prevailed: that is, improve the budgetary situation 
by selling capital assets. This item also had some earmarks of a 
giveaway program. 6 

To give some indication of the estimated needs, particularly for 
the urban renewal program, which required the major part of the 
funds to be discussed just below, I note the following for 1959. The 
administration bill provided for new obligational authority, for 
urban renewal, housing, FNMA special assistance, housing for the 
elderly, college housing loans, and so on, of $1,650 million. The 
Sparkman Bill provided $2,925 million; the Raines Bill — that is, 
the House bill — $2,850 million and the bill introduced by Senator 
Joseph Clark and sponsored by several other Democratic Senators, 
$7,000 million. Senator Clark felt very strongly that the capital 
grant authorization for the urban renewal program required $6 
billion for 1959 and later years. 7 

On July 7, 1959, the President returned S. 57 and refused to ap- 
prove the proposed legislation. His major objections were that the 



284 ^| THE ECONOMICS OF THE POLITICAL PARTIES 

authorizations were excessive, that the bill was extravagant and 
much of the spending it authorized unnecessary, and that the bill 
was inflationary and would substitute federal spending for private 
investment. (Why should a substitution of outlays be inflationary?) 
Again, of course, the issues are the relative importance of federal 
as against private spending, the dangers of inflation, and the need 
of balancing the budget. 8 The President not only vetoed this housing 
bill, but also a later one that reflected some compromises. 

I pointed out in a statement before the Senate Sub-Committee 
on Housing that the budgetary fears of the President were exag- 
gerated, since in his veto message he estimated expenditures of the 
S. 57 at $2.2 billion, even though $475 million were in fact loans. He 
also included $874 million for 45,000 public housing units, even 
though their financing would go on until 1999, with an average 
subsidy of $22 million a year. 

The President not only confused spending and loans, but he also 
included as an obligational authority future costs of financing public 
housing — a new departure in accounting introduced to inflate esti- 
mates of costs. Apparently the President claimed that a financing 
charge of $22 million due in 1999 and earlier years should be counted 
as an expenditure in 1960. This is of course absurd. 

In the President's veto message there was the assumption that 
spending by public interests is inflationary and spending by private 
interests is not. This is a common view held by his party. But both 
types of spending increase demand for goods and labor. If they are 
financed by taxes in one instance and savings in the other, the effects 
are not inflationary in any large degree. Actually the strongest 
pressures on resources have resulted from the rise of private debt 
and the least from federal debt. For example, from 1952 to 1958, 
the rise of federal debt was $10 billion, or 4 per cent; state and 
local debt $25 billion, or 97 per cent; private debt $168 billion, or 
55 per cent. 

In this connection one might again raise the question why Presi- 
dent Eisenhower was anxious to have unlimited guarantees for 
housing. Did he assume that housing guarantees that result in in- 
creased mortgaging and building of homes do not contribute to 
inflation, and when the government, rather than private individuals, 
actually invests in mortgages this has an inflationary effect? 

Again, we should be clear that from fiscal years 1951 to 1953 
to the years 1958 to 1960, housing expenditures inclusive of loans 



Housing and urban redevelopment 285 

on the basis of the President's estimated budget declined by 18 per 
cent, and in a period when the gross national product rose by an 
estimated 40 per cent. 

Why also, if the President was concerned about the relatively 
small increase of expenditures for housing in fiscal year 1960, was 
he not concerned over a $100 billion road program he had proposed 
a few years ago? Could it be because the expenditures have been 
shunted to a trust fund for the roads and therefore do not show up 
in the budget? Senator Sparkman estimated that the Senate 57 
"would increase the President's request for fiscal year 1960 by 
approximately $24 million. Of this amount less than $3 million would 
be actual expenditures — the remainder would be federal loans to 
be repaid with interest. The President should not have character- 
ized lending as if it were 'spending.' " 

Conclusions 

Much remains to be done. Urban renewal expenditures for 
fiscal years 1958, 1959 and 1960 are but a fraction of the sums 
needed. A Republican committee estimated several years ago that 
the necessary redevelopment of substandard housing areas in four- 
teen sample cities would require about 30 times the cost of feder- 
ally aided Title I Redevelopment Projects to date. An average of 
42,000 public housing units in ten years, 1949-1959, and only 19,000 
in 1954 and 1955 can scarcely solve the problem of more than 10 
million substandard units. Each year the number of new sub- 
standard units exceeds the number of units made available by the 
public housing program by several times. We need to increase the 
number of all new units each year from the current average of little 
more than 1 million to 2 million. The government will have to 
subsidize housing not only for the low-income groups but also for 
the middle-income groups. Federal, state and local governments will 
have to cooperate in providing housing subsidies tied to economic 
capacity. The current system does not discriminate sufficiently on 
the basis of income. 

If these objectives are to be achieved, Republicans will have 
to worry less about a balanced budget, support $1-2 billion yearly 
for housing and urban redevelopment (part of it in loans, not ex- 
penditures), be less concerned over competition with private inter- 
ests, and stop trying to put excessive burdens on state and local 
government. 



31. Depressed areas 



f^t Perhaps in no field of economic action was the clash of ideologies 
between the Republicans and the Democrats more evident than in 
the struggle to legislate an area redevelopment bill to take care of 
the distressed labor market areas. 

In a statement before the Senate on May 3, 1958, Senator Doug- 
las had this to say: 

The existence of areas of low economic activity seriously retards the 
rate of national growth, and is in itself a significant cause of self-perpetua- 
tion of low-income, underemployed groups. The goal of achieving full 
utilization of our national resources — land, labor, and capital — will never 
be attained as long as these geographic pockets of continuing economic 
depression persist. 1 

On July 30, 1959, Senator Douglas announced through a press 
release that despite the improvement in the economic situation, 

The number of surplus labor market areas in the United States is 
increasing, not decreasing. In May 1959 (the latest month for which 
figures are available), there were 50 per cent more distressed labor market 
areas, i.e., areas having 6 per cent or more of the labor market unem- 
ployed for substantial periods, than in January 1959 and almost three 
times as many as in August 1957. ... In May 1959 the 179 distressed 
labor markets had almost one-third the nation's unemployed though they 
contained only 14.5 per cent of the nation's working population. 

One problem that troubles an economist is the failure of the 
Eisenhower administration to see that, where there exist islands of 
unemployment in a sea of prosperity, general measures are not 

286 



Depressed areas 287 

likely to be completely effective. It is conceivable that when, for 
example, Lawrence, Massachusetts, has 20 per cent unemployment, 
a tremendous flow of funds pumped into the national economy 
through increased public spending and reduced taxes might ulti- 
mately reduce the unemployment in Lawrence to a manageable 
figure. But this would be an exceedingly wasteful way to go about 
treating a specific local problem. It is as though a patient had a 
small infection and the doctor prescribed some general treatment 
to tone up the whole system, like a large dose of sulfa, whereas a 
little iodine on the small area of infection would have been more 
effective and much less costly to the system. Hence a party that is 
worried about substantial deficits and large public spending should 
certainly be enthusiastic about a relatively costless program that 
would deal with these special areas of unemployment in a direct 
fashion and not depend upon general measures to handle them. 

By this I do not mean that general measures, such as fiscal 
policy, would not greatly reduce unemployment in depressed towns 
or industries. In fact, I found that in eight major industries ex- 
periencing declines in employment, postwar losses of jobs suffered 
were 8 per cent in years of recession and only 1 per cent in years 
of prosperity. But there is a point beyond which pumping more 
money will do little good to the unemployed in coal, textile, rail- 
road equipment, and automobile towns. 

What should be the features of a sound area redevelopment 
program? 

( 1 ) It should provide sufficient resources to alleviate unemploy- 
ment in the distressed areas. 

( 2 ) It should provide resources to enable the displaced workers 
to obtain training for new positions. 

(3) It should provide the facilities and capital that will make 
possible the entry of new industries and employments into the dis- 
tressed areas. 

(4) It should require a contribution by the local and state 
authorities to the total funds made available. But this contribution 
should not be so large as to make the cooperation of state and 
local governments unlikely. These units are often in bad shape. 

(5) Such legislation should also stress aid that will provide 
more than temporary improvement in the situation. 

(6) An adequate bill should also provide for effective adminis- 
tration. There should also be cooperation with private and local 



288 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

interests. The program should be integrated with other federal pro- 
grams that provide aid for local government. For example, adjust- 
ments in the urban renewal program are required so that urban 
renewal may be available to these areas even though the renewal 
program (such as university plans) does not provide residential 
gains. 

One additional item should be mentioned here — that is, that it 
is much better to bring jobs to the man than to move the man out 
of his place of residence to seek a job elsewhere. Our long history 
with unemployment, as well as the British experience, has taught us 
that any sound treatment should concentrate on moving the new 
industry into the place where the unemployed are, rather than 
moving the unemployed away from his home. Increased mobility 
of workers can help substantially when unemployment is low, as 
European experience shows. 

In the light of these criteria, let us consider President Eisen- 
hower's veto of S. 3683, the Area Redevelopment Bill, on Septem- 
ber 6, 1958. ( Similar arguments were raised in the 1960 veto. ) One 
reason given was that no money was appropriated. But this is 
scarcely an adequate explanation, because even though no money 
was appropriated there were certain things that could be done 
under the bill, and passing the bill would have facilitated the voting 
of necessary funds later. The President said in his veto: 

Every year for the past three years I have urged the adoption of a 
program of federal assistance to communities of substantial and persistent 
unemployment, for the purpose of assisting those communities to develop 
a stronger and sounder economic base. I regret that no action along these 
lines has been taken by the Congress until this year and, needless to add, 
I am greatly disappointed that I fine} myself unable to approve the pres- 
ent bill. 

Then President Eisenhower went on to say that the responsi- 
bility should lie largely with the local communities. Here again we 
run into the fundamental issue of relative responsibility of federal 
and local government. President Eisenhower also opposed a pro- 
gram of federal grants for public works in S. 3683, under which it 
would have been possible to have no local participation whatsoever. 
Proponents of the bill, however, felt that there were some local 
governments that simply could not afford to borrow additional 
sums for these purposes. President Eisenhower was also critical of 



Depressed areas 289 

any provisions to take care of unemployment that would be traceable 
essentially to temporary conditions. 

A major source of conflict between the administration bill in 
1959 and the Douglas Bill was the amount of money made available. 
The administration bill— that is, the Dirksen Bill — proposed $50 
million for loans in order to deal with a heavy concentration of un- 
employment in the distressed areas. The Douglas Bill provided $300 
million for loans and $75 million for grants. Besides, the Douglas 
Bill offered additional unemployment compensation tied to a re- 
training program. 

Two other aspects of this problem should be noted. One is that 
the more effective our full employment and growth policies are, the 
less serious the problems of the depressed areas would be. The 
second is, we should have an adequate surplus-labor-area program. 
Until 1961, the government tried to deal with the problem by the 
diversion of contracts, by making special provisions for high-cost 
bids in competition with foreign nations for government contracts, 
by making special provisions for accelerated depreciation in de- 
pressed areas, and the like. But it is also clear that all these meas- 
ures have been most ineffective and inadequate. 

Conclusion 

The Republican administration should not have proclaimed 
great devotion to a program like the area redevelopment program 
and then proposed to make available only $50 million of loans. This 
was deception and nonsense by the administration. Even the Doug- 
las program of $375 million (less in 1960) was inadequate to mop 
up these stagnant pools of local unemployment. But in the current 
situation this is about all that we are likely to get. These pockets 
of persistent unemployment result from changing consumer tastes, 
increased foreign competition, automation, as well as from the emer- 
gence of new industrial areas. They survive in periods of prosperity, 
and, of course, larger amounts of unemployment develop in depres- 
sion. It is of interest here that in response to the recession of 1958- 
1959, there was a very large increase of productivity, and, even as 
the income grew later at a rapid rate, the amount of this kind of 
unemployment tended to increase. In the distressed areas unem- 
ployment tends to be about twice as large as in the nation gen- 
erally, and hence the burden is correspondingly greater. In the light 
of the difficult financial problems of state and local government, the 



290 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

Federal Government should finance a large part of this burden, 
though some contributions should be made by state and local 
government, in part to assure good performance. What is required 
above all are financial aid for public facilities, attraction of new 
capital, retraining of workers, planning of projects, and special 
treatment under various federal programs for the surplus labor 
areas. The Eisenhower theory of programs without funds and a 
general unwillingness to take strong measures to deal with economic 
distress explain the failure to achieve a development program. 



32. Kennedy on welfare 






Early Differences 

On the major issues, Kennedy and Nixon had disagreed ever 
since they entered Congress together. Typical was the favorable 
attitude of Kennedy toward public housing and Nixon's hostility, 
even to the important legislation of 1949. Later when Nixon ad- 
mitted that the 1949 Act had contributed much, Kennedy could 
reply that Nixon, in view of his persistent hostility to housing legis- 
lation, could not take credit. Nor was Kennedy silent on the numer- 
ous repeals and threats to repeal of housing legislation by Eisen- 
hower. Kennedy's urban housing conference was critical of the 
Eisenhower administration for building no more public houses in 
six years than the Truman administration had built in its last three 
years. 1 

Kennedy was also disturbed by the fact that more and more 
the housing program was not building for low- and middle-income 
groups. 2 For example, in 1946, under a major public program, 
monthly mortgage payments of less than $60 accounted for 89 per 
cent of the homes built; by 1959 only 0.7 per cent; in 1946 and 

1959 the respective figures for payments of $90 and more were 0.3 
and 67 per cent. 3 

Despite his hostility to public intervention in housing, Nixon 
supported a vigorous housing program during the campaign. The 

1960 program must encompass not only assistance in financing homes 
and apartments, but also must involve entire communities. 

. . . For sound projects the total number of redeveloped areas should 
become much greater. Our goal . . . should be outright Federal grants, 
with local contributions. 4 

291 



292 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

Nixon claimed that twice as many urban renewal projects were 
built under Eisenhower as under Truman. The fact is that the dif- 
ferences are much greater than he claims. But one must remember 
that the first approval came only in 1950. What the Democrats could 
claim was that under Eisenhower the Democratic Congress was 
disposed to go further than the Executive. 5 

In education also, Nixon's record differed greatly from Kennedy's. 
On one vital tie vote, the Vice-President had killed an important 
education bill. "It is a little late for Nixon to be putting out a 
'position paper' on education — because it cannot paper over his 
record or the record of the Republican Party." Then Kennedy lists 
the Republican anti-education votes in 1956, 1957, 1958, 1959 and 
1960, which killed education bills. 6 (Similarly for 1961.) But neither 
Nixon's record nor his diatribes against Kennedy's spending "orgies" 
nor the record of his party kept him from offering an education 
paper which went far beyond Eisenhower's program and, on some 
points, beyond Kennedy's. 7 

On one fundamental point, Kennedy and Nixon clashed even in 
1960. The Republican position on education had been federal aid 
for construction, but not for salaries. Nixon's contention was that 
contributions for salaries would bring federal control. 

But there was another clash of views on methods of financing. 
The Republican program was one that would put the major part 
of the financing on later years — a period of thirty years. This differ- 
ence is related to fundamental Republican fiscal views: keep cur- 
rent budgetary expenditures down as much as possible — even if the 
alternative is increasing them much more in later years. Thus 
Eisenhower's 1962 budget provided a program that "would stimulate 
and assist in the construction of $3 billion of public elementary and 
secondary schools in the next 5 years by a Federal commitment to 
pay half the debt service (principal and interest) on school bonds. 
The cost to the Federal Government over a 30-year period would 
be about $2 billion." This is indeed an easy way of presenting an 
attractive budget for 1962. Similar proposals were made for higher 
education. 8 

Kennedy and Nixon were also in disagreement on medicine. 
Here the conflict is rather unexpected. The Democrats and Kennedy 
support hospital aid for the old under social security. They do not 
welcome a means test which is required under the Kerr-Mills Act, 
and they prefer financing under the Social Security Program. This 






Kennedy on welfare 293 

is held to be an insurance program. The appeal to Kennedy's pro- 
posals also lies in the fact that no burden is put upon the general 
taxpayer, and implementation by action of fifty states is not 
required. Incidentally, the costs are on the trust fund and not on the 
budget. This is the surprising feature of the Republican position. 
They support a program which is costly to the general taxpayer and 
the budget, an unusual position for them to take, a fact explained 
by a fear that compulsory hospital insurance for the old would ulti- 
mately bring national health insurance, or as they prefer to call it, 
socialized medicine. Pressure of the AMA accounts in no small part 
for the current Republican position. A compulsory health insurance 
program "is the first step towards socializing the medical profes- 
sion. . . . 9 

Principles of Welfare Legislation 

Kennedy was more disposed to spend for welfare than Eisen- 
hower, Nixon or the Republicans generally, because the Democrats 
are the party of the little man. But the issue was not only an ideo- 
logical one. The Democrats tied expenditures to the size of the 
economy and they expected that, as the economy grew, there would 
be more available for welfare without increasing the burden on the 
taxpayer — assuming no hot war. In his Message on the Budget and 
Fiscal Policy of March 24, 1961, the President said: 

. . . We can afford to do what must be done, publicly and privately, 
up to the limit of our economic capacity — a limit which we have not 
even approached for several years. . . . 

Federal revenues and expenditure level must be adequate to meet 
effectively and efficiently those essential needs of the nation which require 
public support as well as, or in place of private effort. 

The President and his Budget Director on numerous occasions 
developed the theme of expanding public outlays related to the 
growth of the economy and with "each expenditure evaluated in 
terms of our national needs and priorities. . . ." 10 

Growth would not only make possible larger welfare expendi- 
tures, but many of these outlays would also stimulate growth, and 
notably outlays on education, research and natural resources. 11 On 
a number of occasions the President suggested, along Galbraithian 
lines, that larger relative public outlays were necessary. In his 



294 }0t THE ECONOMICS OF THE POLITICAL PARTIES 

opposition to a tax cut in 1961, one argument he used was that a 
tax cut would reduce necessary public outlays. 

These were not the only supports for increased welfare outlays. 
Like Roosevelt, he would spend in order to relieve distress; and he 
would spend in order to stimulate the economy in a recession. Once 
the recession had given way to recovery, some of these outlays 
would not be necessary. 12 

Nixon time and again during the campaign charged that Ken- 
nedy was a spendthrift, that his domestic programs would cost $15 
billion a year more than Nixon's would, and agriculture alone would 
involve $10 billion of outlays more than the Republican program. 13 
This attack, repeated on numerous occasions, was of course an at- 
tempt to label Kennedy as an irresponsible spender. 

But this is scarcely a tenable position. Kennedy was concerned 
over the size of the budget. Many of his advisors believed he was 
overly concerned. He was aware of the political implications of 
large public outlays and deficits. His caution is suggested by the 
following: 

1. The strong support given to those policies that would yield 
additional employment with minimum costs. Thus he stressed more 
than some of his economic advisors the gains that might be made 
through direct attacks on structural unemployment rather than 
through the use of fiscal policy. Hence his enthusiasm for the Area 
Development Program and Manpower Training. The former would 
cost only about $400 million over several years; and the Secretary 
of Labor estimated that 800,000 workers could be retrained in four 
years at a cost of $700 million. Hence should only one out of eight 
find a job as a result of this program and hold it for eight years, 
the cost to the government per man-year of employment would be 
less than $1,000. Savings on relief, unemployment compensation, 
increased tax receipts and so on would offset this cost. The fiscal 
policy approach would be more expensive. A million man-years of 
work would require a rise of gross national product of about $10 
billion and hence a deficit with a multiplier of 2 1 /? of $4 billion or 
$4,000 per man-year of work. These are, of course, the roughest of 
calculations, and when demand is greatly deficient the profits from 
the direct attack may be small. 

2. Kennedy's concern for the taxpayer is also suggested by his 
stress on the use of insurance programs ( trust funds ) to deal with 
welfare programs — for example, unemployment, medical aid. These 



Kennedy on welfare 295 

are programs that are self-financed and relieve the general taxpayer 
of additional burdens. The beneficiaries pay the bill; and hence 
general tax revenues are reserved for other programs. 

Perhaps the best evidence of the concern for deficits and public 
outlays is the small deficit in fiscal year 1961 — approximately $4 
billion, and $7 billion in 1962 (October 1961, estimates). These 
deficits can largely be explained by the rise of military programs and 
Eisenhower's overestimate of revenues and underestimate of ex- 
penditures required for his programs. 14 

The deficit in fiscal year 1959 was $12.5 billion and this was not 
to be explained by a military build-up. Even a deficit of these pro- 
portions every third year would be no disaster. The costs of interest 
allocated over two good and one bad year would be less than 1 per 
cent of the average growth of the economy. But Kennedy clearly 
did not want a deficit even of these proportions. 

In his spending on welfare, Kennedy had in mind another prin- 
ciple. He had noted on a number of occasions that the government 
should distinguish between current and capital outlays. That one 
of his most ambitious programs was in housing is related to this 
point. In the light of Kennedy's concern about the budget, one might 
be puzzled by his program of more than $6 billion additional au- 
thorization for housing. But the sum involved is not nearly so large 
as it seems, first because expenditures in F.Y. 1962 would be much 
smaller than the $6 billion, and second, a large part would be in 
loans, not in exhaustive expenditures. Of the $6.2 billion in the 
Senate version, closely following the President's recommendations, 
$3.5 billion were loans, not grants. In his 1962 Budget, President 
Eisenhower proposed new obligational authority in housing and 
community development for 1962 of only $1,097 million, in com- 
parison with expenditures of $651 million in F.Y. 1961. Aside from 
the issue of loans versus exhaustive expenditures, the Kennedy pro- 
gram marked an important advance: he proposed forty-year loans 
with low interest and no down payment as a means of helping 
middle income groups; long-term loans for home improvement (in- 
serted in the Senate); 100,000 additional public housing units for 
low-income groups. 15 

Two other aspects of the Kennedy welfare program deserve 
special comment. The administration has been anxious to exploit 
back-door financing. The Eisenhower administration was not averse 
either. But an administration that is anxious to spend adequately 



296 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

for welfare finds in back-door financing an assurance of a planned 
program over several years, and adequate finance. In this manner 
the excessive restrictions of numerous sub-committees of the Con- 
gressional Committees on Appropriation are avoided. This freedom 
is had not only through the usual back-door financing — that is, 
borrowing from the Treasury — but also in the large recourse to 
trust funds and even numerous federal grant programs. The Con- 
gress lays down the benefit and tax schedules and also ( under grant 
programs) the proportion to be donated by the Federal Govern- 
ment. Within these limits the Federal Government is free to spend. 
Undoubtedly the popularity of social security with the Democrats is 
thus partly to be explained. 

It is a cardinal principle of the Democratic party to distribute 
in favor of low income groups. A comparison of income distribution 
in the 1940's and the 1950's clarifies this point. Again, in the struggle 
over the temporary unemployment bill the administration fought for 
a pooling principle under which states with relatively little unem- 
ployment would pay part of the bill of the states with large amounts 
of unemployment. The theory behind this is in part that unemploy- 
ment was largely the result of national forces. 16 

Welfare programs are not merely a matter of money. The re- 
markable feature of Kennedy's program was the speed and the 
ground covered in the first six months. On February 6, 1961, 17 days 
after the Inaugural, for example, the President had issued his request 
to Congress for temporary unemployment benefits and on March 
24th the proposal became a public law. In comparison, it took Eisen- 
hower nine months from the beginning of the recession (March 
24), and only after Senator Kennedy began to push for permanent 
changes, to propose temporary benefits for 800,000 workers who had 
exhausted their benefits. The legislation was not forthcoming until 
May 28, 1958. In less than six months President Kennedy had on 
the statute books a depressed area bill (May 1), a minimum wage 
bill (May 5), temporary unemployment benefits (March 24), lib- 
eralization of Social Security benefits (June 30), a bill providing 
aid for dependent children with unemployed fathers (March 8), a 
feed grains program (March 22), the OECD Treaty (March 23), a 
water pollution bill (July 20), an omnibus housing bill (June 30). 
The President had nine of his sixteen point priority list approved 
by Congress, and others far along. This record did not equal that of 



Kennedy on welfare 297 

the 1933 crisis, but was incomparably better in the early months than 
Eisenhower's record of 1953. 17 

Despite the blocks of the Congressional Rules Committee, 
despite the serious national security problems, despite the problem 
of finding his way around at a changeover of administrations, Ken- 
nedy had advanced far in the first six months of his administration. 
A strong and vigorous President could accomplish much and with- 
out signs of what his detractors call fiscal irresponsibility. Additional 
expenditures related to a growing economy could be achieved with 
moderate deficits at first, and even surpluses later. 

One reason for the remarkable program was Kennedy's uncanny 
use of talent. Through the use of innumerable task forces he mobil- 
ized unusual ability; and these men and women provided the Presi- 
dent with analyses of major issues. Integrating these plans into an 
over-all plan to operate within the limits of the resources available, 
the President could quickly send many statements of high quality to 
Congress. Each task force might indeed, concentrating on its prob- 
lem, ask for more action and dollars than were available for the 
treatment of its problems. But the President could easily adjust 
and reconcile differences; and then members of the task forces could 
be fitted into the administration for larger service. 

The Advances of Kennedy 

By December, 1961, Kennedy had advanced on many fronts. His 
major delays were in hospital insurance for the old and aid to 
education. I have already listed the completed legislation. In addi- 
tion, some progress had been made on several other welfare items. 

What principles can be drawn from the Kennedy program? 

Certain budgetary aspects require emphasis. The task forces 
generally tended to recommend programs that were more ambitious 
than the general budgetary situation allowed. This is easily to be 
explained by the fact that each task force tended to concentrate on 
the gaps in its area rather than on the relation of total resources to 
total demand. In education, for example, though the President 
followed the recommendations of the task force, he proposed to 
spend substantially less than the $9 billion over four years suggested 
by the task force. 

In urging his welfare program's, the President was careful to 
underline the budgetary limitations. His espousal of an advanced 



298 }0, THE ECONOMICS OF THE POLITICAL PARTIES 

housing bill and his success with it was undoubtedly in part the 
result of the nature of the expenditures: they were primarily in- 
vestments, not expenditures in the usual sense. Where grants were 
involved, the Congress cut the President's proposals — for example, 
$2 billion for urban renewal over four years, not $2.5 billion as 
proposed in the President's message. In the area of government 
guarantees the Congress tended to go farther than the President. 
Again, in the program for natural resources, where Kennedy 
would move far beyond the Republicans, he was careful, for ex- 
ample, to develop his flood control program as rapidly "as our fiscal 
and technical capabilities permit." The President, moreover, failed 
to follow up on the following from his Task Force on Resources : 

We believe that the national budget policy should distinguish be- 
tween capital investment and operating expenditures in the natural 
resource field. 

In his support of resource expenditures Kennedy also stressed 
the need of participation of local and state government and private 
enterprise. "It is not a task which should or can be done by the 
Federal Government alone." Here he seemed to be influenced by 
the last administration. 

Kennedy's concern for the budget is also evident in other ways. 
For example, under the natural resources program he stresses es- 
pecially planning for the improved use of resources and better in- 
tegration and pricing. In his education proposals he is at pains to 
urge that federal subsidies be accompanied by increased efforts 
by state and local government, and, unlike earlier proposals of the 
Democrats, the help by the Federal Government is to be related 
to the economic capacity of each state. Even in the hospital insur- 
ance — financed under a trust fund — the President, unlike the task 
force and at odds with many experts in the field, would require 
that the insured share in the costs of hospital care as a means of 
averting excessive and wasteful use of facilities. Finally, the rise of 
housing is tied to a plan of credit and reduced rates of interest — 
items not generally related to budgetary strains. 

Another feature of the Kennedy welfare legislation is the great 
concern for the low-income groups. In housing, he proposed es- 
pecially programs for the low-income groups — forty-year mortgages 






Kennedy on welfare 299 

and no down payments; and for the very low income groups 100,000 
public housing units and loans to cooperatives and other nonprofit 
organizations for building housing units. ". . . but we must still 
redeem the pledge to the 14 million American families who cur- 
rently live in substandard or deteriorating homes, and protect the 
other 39 million American families from the encroachment of blight 
and slums.'' The administration introduced a program providing 
long-term improvement in unemployment compensation: a rise of 
tax receipts, liberalization of benefits, and financing of states with 
much unemployment in part by other states. Additional finance 
was to be had by raising the wage base to be taxed rather than by 
a rise of tax rates — this favored the low-income workers. 

Of the old ( aged sixty -five and over ) , Kennedy pointed out that 
"their physical activity is limited by six times as much disability 
as the rest of the population. Their annual medical bill is twice that 
of persons under sixty-five — but their annual income is only half as 
high." Hence the enthusiasm for hospital care for the old. 

"... A recent survey of a very large elementary school in one 
of our major cities, for example, found 91% of the children coming 
to class with poor diets, 87% in need of dental care, 21% in need 
of visual correction and 19% with speech disorders." This state of 
affairs was one of the justifications for federal aid to education. 

For Kennedy, the long view was imperative. Nowhere is this 
more clear than in his program for natural resources. It is necessary 
to have plans for rivers not developed by 1970; trees planted now 
will not be available until the year 2000, and hence the need of 
action now; assurance of effective use of natural resources requires 
identification of need and location of future reservoir sites now — 
commercial and residential development may increase costs and 
increase opposition to development later. Now is the time to plan, 
for our population will double in forty years, water use will double 
in twenty years — ". . . we are harvesting our supply of high-grade 
timber more rapidly than the development of new growth; too much 
of our tops oil is being wasted away; . . . our minerals are being 
exhausted at increasing rates. . . ." 

Hence the importance of such measures as reforestation, con- 
version of saline water, pollution control, development of our ocean 
resources, which will yield much oil and minerals, more effective 
use of the 477 million acres of public domain, optimum use of water 



300 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

resources, inclusive of use for hydroelectric power where justifiable 
— for by 1980 installed capacity will have to treble to meet growth 
requirements. The Select Committee on National Water Resources 
estimated the nation's need for water by 1980 would cost $54 bil- 
lion. 18 

Republican Attitudes in 1961 

Despite the promises of the Republican platform and Vice-Presi- 
dent Nixon, the Republican attitude has been against the 1961 wel- 
fare programs of the administration. The Congress on the whole 
has gone along with the President in most programs, though in actual 
grants they dragged their feet a little on housing, and were some- 
what less generous in the social security amendments than those 
proposed by the President. 

Republican policy is revealed by criticisms by Eisenhower, Nixon 
and Goldwater in 1961 of the excessive spending by the Kennedy 
administration. The voting record is also of some interest. Thus on 
the Omnibus Housing Bill, the vote in the Senate on Bush's motion 
to recommit and cut $1.6 billion in authorizations was: Democrats, 
yes 12, no 45; Republicans, yes 30, no 2: on the final Conference 
Report; Democrats, yes 30, no 2; Republicans, yes 5, no 27. In the 
Senate, on the final vote for school aid the result was 41 to 12 in 
favor by the Democrats, and 22 to 8 against by the Republicans. 19 



Part VII 

USE OF RESOURCES 






33. Natural resources 



Introduction 

This essay is an appraisal of Republican resource policies. It is 
not a particularly cheerful tale. 

In the early part of the twenty-first century, the population of the 
United States should rise roughly to about twice our present popula- 
tion of about 180 millions. In view of this expected rise of popula- 
tion, trends in the supplies of food and raw materials for this coun- 
try are of great importance. Whereas in 1900 we were substantial 
exporters of raw materials, now we import substantial amounts, 
and our imports will continue to rise. As the Paley Commission 
showed in 1952, the country will need large additional supplies of 
raw materials and power in the next twenty-five years. In order to 
obtain required supplies, we shall have to import more, economize, 
exploit our great scientific potential as the means of obtaining 
substitutes, and we shall have to make the best possible use of our 
limited agricultural land, mines, forests and rivers. And the rising 
population and increased leisure suggest the need of supporting and 
extending our recreational areas. 

Two great Republicans, Gifford Pinchot and Theodore Roose- 
velt, started our modern conservation program, whose policies were 
continued by Franklin Roosevelt. Since 1952, we have progressed 
little and may even have slid back. 

Despite the fact that gross national product rose about 15 per 
cent from fiscal years 1953 to 1956, federal expenditures on natural 
resources had risen but 2 per cent by 1956. In view of the promises 
of President Eisenhower in the 1952 campaign and in view of the 
fact that, with our rapidly rising population and the intensive use 

303 



304 f^f THE ECONOMICS OF THE POLITICAL PARTIES 

of our resources, one might expect that expenditures would increase 
much more than gross national product, we experienced a relatively 
large decline in the early years of the administration. From fiscal 
years 1953 to 1961 (estimated) the rise of expenditures was only 
32 per cent, a figure considerably less than that for gross national 
product. In view of the increasingly tough problems of obtaining 
adequate power, raw materials, recreation facilities and the like, 
we might have expected a rise at least equal to that in gross national 
product. 

Even when the Eisenhower administration received substantial 
sums from the Congress to spend for the development of natural 
resources, the administration frequently thwarted Congressional 
intentions, as in other fields, by not spending the money that Con- 
gress appropriated. 

In 1955, President Eisenhower complained bitterly about the 
large increase in the new construction starts in the Public Works 
Bill, and he added: "As a consequence of these considerations, 
initiation of the added projects cannot be undertaken until the 
detail engineering plans have been completed and we have a sound 
basis for cost estimates." 

This comment reflects very well the determination not to spend 
the money appropriated, or at least not to spend it very quickly. 1 
In 1958 and 1959, the President vetoed important resource bills on 
the grounds that this was no period in which to make new starts. 

The TV A 

The struggle over the Tennessee Valley Authority highlighted the 
attitude of Republicans toward the exploitation of natural resources. 
In the campaign, speaking in TVA territory, the President promised 
that he would support the TVA and would not in any sense try to 
reduce its significance or importance. In a veto message relating to 
the disposition of Muscle Shoals, Herbert Hoover, while President 
of the United States, had said: "It won't work." He stated that the 
power operations project would "show a loss . . . that no chemical 
industry with its constantly changing technology and equipment, 
its intricate problems of sales and distribution, can be successfully 
conducted by the government." 2 

Opposition to the TVA ultimately led to the Dixon-Yates fiasco. 
This episode has been discussed so fully in the press that I need 
not dwell on it here. Rather than allow the TVA to expand its ca- 



Natural resources 305 

pacity by building a steam plant, the government decided that the 
proper approach would be to bring in a private public utility or- 
ganization to provide the additional power. The AEC, which had 
no interest in the additional power, would be the intermediary for 
the government. Power would then be sold to consumers needing 
power in the TVA area. In this way, the contribution of the TVA 
would be kept down. 

In pushing through the Dixon-Yates program, the administration 
made some crucial errors. First, the additional cost involved, as 
against providing the facilities through the TVA, would be $90 
million or more. Second, Mr. Adolph Wenzell, who had acted as an 
advisor of the Budget Bureau, was also involved in this project, 
since his First Boston Corporation was to finance the project for 
Dixon- Yates. Third, though the Director of the Budget, Mr. Hughes, 
knew about this conflict of interests, he claimed he did not mention 
it to the President or to anyone else. And, in fact, when he was 
asked to make public all the details, he kept Mr. Wenzell's name out 
of his chronology of events. Sherman Adams held up a hearing at 
which Mr. Wenzell was supposed to testify before the SEC, so 
that, it is claimed, Congress would vote a $6 million appropriation 
to provide transmission lines for the Dixon-Yates project. 

The final outcome was that the Justice Department told the 
courts that the agreement was contrary to public policy and null 
and void: 

Both the role played by Wenzell, consulting, advising and represent- 
ing the government, the First Boston Corporation and plaintiff (Missis- 
sippi Valley) with respect of the same project and the same alleged agree- 
ment, with contemplated benefits to the First Boston Corporation, as 
well as to plaintiff, involved the conflict of interests so contrary to public 
policy as to render the alleged agreement null and void. 3 

In an article in The New York Times of July 27, 1956, it was said: 

In June 1953, the President referred to the TVA as creeping social- 
ism; in his campaign he had said that TVA would be maintained at 
"maximum efficiency." Nevertheless, there has been a steady drive in 
the Administration to make TVA speed up its payments to the Treasury 
on $2 billions of federal investment; Dixon-Yates appeared to be an at- 
tempt to challenge the Authority in one of its major functions — low cost 
power. 



306 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

Hell's Canyon 

Ever since 1947, the Idaho Power Company of Maine has been 
trying to take over Hell's Canyon, or at least to develop Snake River, 
in opposition to any public development of this river. The issue 
has come down largely to the question whether it is desirable from 
the public viewpoint to have two or three small private dams or for 
the Federal Government to develop a major site (namely, Hell's 
Canyon), which could produce much more power than the two or 
three sites that the public utility company was interested in and 
which would also provide for irrigation, recreational and other 
services that come with multipurpose river development. 

In referring to this episode, Governor Stevenson, in a speech in 
Portland, Oregon, on February 11, 1956 said: 

... it [the Democratic party] places peoples' needs above corporate 
aims, values above profits, tomorrow above today. It insists that our 
natural resources be so developed as to produce the greatest good for the 
greatest number — including generations as yet unborn. 

By this standard, three — or now two — small dams on the Snake River 
are wrong, one big dam is right. For the next generation of Americans 
in the Snake River basin are entitled to the maximum amount of cheap 
power, irrigation water, flood protection, navigation and recreational 
facilities which the benevolent Creator marked at the request of the 
people of this area. . . . 

The Democratic majority of the Senate Interior and Insular 
Affairs Committee showed that benefits from the federal project 
would be two to three times as great as from the private proposal, 
and especially because of the much larger power output, the much 
lower cost, and the greater water storage capacity in the federal 
dam. 

On July 19, 1956, 39 Democrats voted for a federal dam and 8 
voted against, and the Republicans voted 3 for and 43 against. 4 

In their able study, 5 Messrs. Krutilla and Eckstein conclude that 
the High Dam would be the most efficient plan at an interest rate 
of 2y 2 per cent. But at a cost of 5-6 per cent, the Hell's Canyon 
High Dam may be less efficient than a development on a somewhat 
smaller scale. The authors view a two-dam development as generally 
more efficient than the three-dam plan of the Idaho Power Company. 



Natural resources 307 

The small rate of operations of this company results in serious 
losses as compared to what might be achieved with the High Dam 
plan or the alternative two-dam plan. Here the administration was 
at fault for not considering seriously the various alternatives. 

The turning over of Hell's Canyon to the Idaho Power Company 
resulted in large and vehement protests in the press. For example, 
the St. Louis Post-Dispatch said: 

It would be difficult to say what is most wrong with the Federal 
Power Commission's decision to turn the great water power resources 
of Hell's Canyon over to the so-called Idaho Power Company. It would 
be difficult to say because so many things are wrong — from the stand- 
point of conservation, of power potential, of irrigation, of integrated use 
of irreplaceable resources. 

Then as if this "give away" decision were not bad enough in itself, 
the FPC pulled a sneak play by waiting until two days after the end of 
the Congressional session in order to reduce the full effect of the opposi- 
tion. To make it still worse, only the release of the news was held up; 
the decision was reached before Congress closed. 6 

The New York Times (August 11, 1955) had this to say: 

We find it difficult to reconcile the President's words regarding the 
handling of this sort of project "intelligently on a broad base" with his 
Administration's approval of a method of developing this publicly owned 
natural resource in a way that might actually prevent realization of its 
potential . . . not only the northwest, but the entire nation could be 
the loser. 

The Upper Colorado River 

Donovan tells us that on July 31, 1953, "Secretary McKay pre- 
sented a draft of a new statement on power policy, reversing the 
emphasis of the preceding Democratic Administration on federal 
responsibility for building power facilities and placing primary 
responsibility upon the people of local communities for supplying 
their power needs. . . ." 

In his State of the Union Message in 1955, the President urged 
Congress to approve a billion-dollar federal project for water storage 
facilities in the Upper Colorado River basin. He also wanted action 
on the Frying Pan-Arkansas Water and Power project. 7 



308 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

Why, it may be asked, did the administration approve of these 
two projects and fight the Hell's Canyon federal project? Un- 
doubtedly, the influence and pressure of McKay in the northwest 
had something to do with the decision. But according to The New 
York Times, a much more important factor was that public power 
was not the primary objective in the Colorado and Frying Pan 
projects. 

The late Senator Neuberger said: "The actual reason for not 
constructing federal dams in the Columbia Basin today is that 
private utilities crave these magnificent sites where kilowatts can 
be produced so cheaply. No power company, with management 
capable of passing a sanity test would think of investing stock- 
holders' funds in concrete poured into the unprofitable and marginal 
location involved in the Upper Colorado. . . ." 

Indeed, the Colorado River project was not easygoing. Even 
some of the Democrats objected. Senator Douglas, in a brilliant 
speech on April 18-19, 1955, pointed out that just when the country 
was trying to remove from use millions of acres of land the govern- 
ment was spending a very large sum of money in order to put into 
cultivation land that was not nearly so good as land that was being 
taken out of cultivation in his own state of Illinois. He also said: 

... a recent article by Paul B. Sears . . . shows that if we put 
additional water on the lands of Illinois, Iowa, Indiana, Ohio, upper 
New York, and the cotton states of the Mississippi Delta, at a cost of 
from $30 to $60 an acre — I believe in no case more than $100 an acre — 
we can obtain vastly greater production than by putting water on the 
arid lands of the Mountain States at a cost of many hundreds of dollars 
an acre. 

The late Senator Neuberger wanted to know why the adminis- 
tration put this site at the disposal of the Idaho Power Company 
and then would support a federal project on the Upper Colorado 
River, when Hell's Canyon would cost $357 million and provide 
5.5 billion kilowatt hours of power production, while Glen Canyon 
and Echo Park on the Upper Colorado would cost $598 million and 
produce only 4.8 billion kilowatt hours. 8 "Partnership 'is an in- 
triguing gimmick.' The government pays for the dead weight part 
of the dam such as fish ladders, flood gates, and navigation locks. 
The syndicate of utility companies finances the power house and 



Natural resources 309 

restores the generation equipment. In return the companies get a 
monopoly on the dam's power production for half a century. . . ." 

Other Aspects of Resource Policy 

Republicans are accused not only of irresponsibility in turning 
over important public property to private interests without adequate 
compensation and without adequate attention to the most complete 
development of these resources, but also in some instances of some 
chicanery. The case that attracted the most attention was the Al 
Sarena grab. 

Here is what the Senate Subcommittee on the Legislative Over- 
sight Function and a House Subcommittee on Public Works and 
Resources had to say about this particular venture. 

Majority report: "The joint committee submits the following findings 
and conclusions: 1. Al Sarena Mines, Inc. sought patent to the 23 mining 
claims in the Rouge River National Forest in order to obtain a title to and 
market the timber, knowing from past failures and from analysis after 
analysis that the property offered no hope as a profitable mining venture. 
This conclusion is supported by the following: (a) The company could 
have continued exploration and mining under its claims without patents. 
(b) There has been no mining on the Al Sarena claims since 1943. (c) 
Since patent was granted in 1954, the patentee has sold in excess of 2 mil- 
lion board-feet of timber from the claims, (d) Every fact thus far devel- 
oped about the area as a mining venture in its more than 20-year history 
of exploration testing, promotion and actual mining on the uncontested 
claims only, shows that it holds no future promise as a mining project. 
... 2. The methods used to obtain evidence supporting issuance of 
patent and adjudication of the matter violated the Administrative Pro- 
cedure Act. ... 3. The Solicitor of the Department of the Interior could 
not have ordered the issuance of a patent on the basis of the evidence of 
record in the case and in granting patent as a result of the procedure 
undertaken here, he violated all known departmental precedents." 9 

In its 31st Intermediate Report, in July, 1956, the Committee on 
Government Operations had this to say: 

In the face of a growing need to develop our public timber resources, 
the executive agencies have failed to submit to the Congress realistic 
and adequate long-range program information and budgets. In almost 
every area the timber access road system is inadequate, timber inven- 
tories are out of date, personnel is insufficient to sell the full allowable 
cut, and reforestation is lagging. 10 



310 ]& THE ECONOMICS OF THE POLITICAL PARTIES 

In a letter to the Washington Post early in 1956, I had criticized 
some policies of the administration and incidentally commented on 
the Giveaway Program. Secretary of the Interior McKay replied 
to my letter and had the letter also inserted in the Congressional 
Record. Secretary McKay said: 

. . . Dr. Harris makes the unsupported statement that ... on one 
major issue they [the Republican leaders] break with the New Deal com- 
pletely; instead of preserving natural resources for all the people they 
seem determined to give them away. 

... As I have said Dr. Harris failed to cite a single policy or action 
by the Eisenhower Administration to support his allegation that the 
Republicans are not preserving natural resources for all the people. . . . n 

Congressman Reuss in a letter to the Washington Post and Times- 
Herald, of March 17, 1956, replied to Secretary McKay: 

The only reason we have any waterfowl left is because the Depart- 
ment of the Interior over the years has been willing to outlaw the market 
hunters, the duck-baiters, and the other predatory groups which have 
been intent on making ducks and geese go the way of the passenger 
pigeon. . . . 

Under Mr. McKay's administration, violations of the Federal anti- 
baiting regulations have been winked at on a wholesale basis. For the 
past three seasons hunting clubs in California have been allowed to feed 
and bait ducks as close as 200 yards to the blinds with impunity. In the 
1954 season, for example, there was not a single prosecution in the 
length and breadth of California for violation of the Federal antibaiting 
regulation. . . . 

Then came Mr. McKay. The Department of the Interior, proclaiming 
that it wanted to "tighten up" the policy on granting oil leases, issued 
a stop-order on Aug. 31, 1953, announcing that it intended to "suspend 
action on all pending oil and gas lease offers and applications." Then, 
in the 28 months between August, 1953 and December, 1955, while the 
stop-order remained in effect, Mr. McKay's department proceeded to 
grant 566 oil leases in the wildlife refuges! 

Failure to provide adequately for public production of atomic 
power is another criticism of the administration. On July 27, 1956, 
The New York Times wrote: "This new source of power has gone 
deliberately untapped through three and one half years of the 
Eisenhower Administration. Presumably, given the continuation of 



Natural resources 311 

Eisenhower policies it will remain untapped for some time in the 
future." 

Senate Democrats supported the Gore-Holifield Bill, which 
would have provided a government atomic power generating pro- 
gram to serve as a yardstick. The vote of Democrats, 46 in favor, 
none against, Senate Republicans 3 for, 40 against. In the House, 174 
Democrats voted for and 27 against. In the House, Republicans 
voted 17 for and 176 against. It is no wonder that in 1954, speaking 
in Albuquerque, Governor Stevenson protested against the Repub- 
lican atomic energy policy. He pointed out that the American people 
had invested $12 billion in atomic power. Only at the last minute 
did Democrats, led by Senator Clinton Anderson, manage to pre- 
vent a complete giveaway of the fruits of misinvestment to private 
companies. 12 Elsewhere I discuss the large decline in appropria- 
tions for atomic power and in general for public use of atomic energy 
since 1952. 

It is scarcely necessary to discuss the natural-gas fiasco. The 
President finally vetoed the Natural Gas Bill, which would have 
relieved the industry of price regulation, not because he objected 
to the substance of the bill, but because the industry had used 
unfair and dubious methods to try to defeat it. Senator Douglas, in 
a four-day speech against the bill (H.R. 6645), made the point that 
the gas companies did not need an increase of income of from $600 
to $900 million a year, and that they did not deserve from $12^ to 
$30 billion in windfall profits, which would result from the enact- 
ment of the bill. 13 

Above all, we need improvements in technology and substitutes 
for materials that are rapidly being exhausted. Yet, early in the 
Eisenhower administration, the government shut down a $35 million 
plant that was well on its way to producing oil from coal, and then 
sold this plant to the Hercules Powder Company at 14 per cent 
of cost to the taxpayer. Similarly, a large experiment to get oil from 
shale, which might produce six times as much as our present re- 
sources of oil, was abandoned. These are petty economies, pleasing 
to private interests directly involved but potentially enormously 
costly to American consumers. 

Concluding Remarks 

The Eisenhower administration did not have a real resources 
policy. Its attitude often was to regard the people's domain as a 



312 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

fair field for the private profits of a few. The administration did 
not use effectively foreign sources of supplies, especially where our 
own supplies are rapidly being exhausted. The Paley Commission 
had urged greater recourse to foreign supplies to supplement our 
dwindling resources. However, the government paid little attention 
to the recommendations of the Paley Commission or to the Presi- 
dent's Committee on Water Resources, or, in fact, even to its own 
Cabinet Committee on water. As late as 1960, even on the basis of 
past experience, the government would not pay much attention to 
the recommendations of the National Outdoor Recreation Resources 
Review Commission, established by Act of Congress and assented to 
by the President. 

It seems costly to restrict the importation, for example, of oil and 
of nonferrous metals when the net result is that our scant supplies 
will be used up much more quickly and current prices will be much 
higher. It is also unwise to cut down appropriations for flood control, 
and then after long negotiations, following a billion-dollar flood, to 
achieve a flood insurance bill which is then administered so badly 
that the Congress refuses to appropriate the money required to 
operate the program. In the light of the fact that there will be 210 
million Americans by 1975 who will require twice as much water 
as we need today, consume 40 per cent more food, require much 
greater amounts of minerals and, with more leisure, use our recrea- 
tional land and streams increasingly, policies have been most inade- 
quate. 

In criticism of the Eisenhower water policy, Governor Stevenson 
had this to say in 1956: 

And this means developed to their utmost — for their hydro-electric 
power, for flood control, navigation, irrigation, and recreation. Water 
runs down-hill. Water is just as wet and life-giving to farmers' crops 
after it has fallen through a turbine and twirled the hydro-electric gen- 
erator as it was before. The water which flows as snow melts out of a 
mountain forest can be caught behind a dam and put through generators 
for power, then recaptured and stored to prevent floods, then diverted to 
irrigate arid fields, then used to establish a navigable channel and carry 
off municipal wastes farther down stream — all the same water. And this 
is all that multiple-purpose development means. 14 

The Democratic National Committee in 1959 sponsored a pam- 
phlet by the Advisory Council on a Democratic Approach to Amer- 



Natural resources 313 

ica's Natural Resources, which was written under the chairmanship 
of Professor Gilbert White, head of the Department of Geography 
at the University of Chicago and formerly President of Haverford 
College. Here are a few excerpts: 

. . . improvements in technology are providing more efficient pro- 
duction of some resources, as in the case of the bituminous coal mines, 
where more coal is mined with fewer men than twenty years ago. Not 
all materials industries are making as rapid advances in efficiency! Given 
enough technological change and innovation at the right time and place, 
there would be little reason to fear resource exhaustion, but the organi- 
zation of industry and unsound public controls on resource exploitation 
may prevent this change. . 

In the face of conditions which call for strong and imaginative action, 
the Republican Administration has taken a generally passive role in the 
management of our natural resources. It has been willing to abandon basic 
principles of comprehensive development and use for optimum benefits. 
Its administration of the long-established policies has been spineless. It 
has watched precious time being lost in preserving essential resources. 
It has let private enterprise claim uniquely valuable public sites. . . , 15 

The Eisenhower achievements should be compared with the 
President's promises in 1952 and with his claims in 1956. Summing 
up his ten major pledges on November 1, 1952, the candidate said: 

. . * I shall also support programs to promote soil and water conser- 
vation and shall zealously encourage the conservation of natural resources 
and the cooperation of every appropriate agency of the federal govern- 
ment. In the development of water storage basins for reclamation of the 
land of the great West, I shall recommend that the Congress make avail- 
able public money for the construction of such projects wherever 
needed. . . . 

On October 17, 1956, in Seattle he said: ". . . This Administra- 
tion has not taken 'it' away. It' — the productive power of America — 
has never been the gift of any political party. It' would not be 
'taken away.' 'It' only had to be released and encouraged. And this 
— we have done." 



34. Agricultural policy 



Eisenhowers Promises 

In his famous farm speech at Kasson, Minnesota, on September 
6, 1952, General Eisenhower said: 

The first thing we intend to do is take the emphasis off of Washing- 
ton. The American farmer has had enough of government by long dis- 
tance. 

. . . There will be no more of this business of using federal power 
to extort the farmer's vote. 

... I say to you that I stand behind — and the Republican party 
stands behind — the price support laws now on the books. . . . 

These price supports are only fair to the farmer to underwrite the 
exceptional risks he is now taking. . . . 

I firmly believe that agriculture is entitled to a fair, full share of the 
national income and it must be the policy of government to help agri- 
culture to achieve this goal in ways that minimize government control 
and protect the farmers' independence. All I know of farmers convinces 
me that they would rather earn their fair share than to have it as a 
government handout. 

And a fair share is not merely 90 per cent of parity — it is full parity. 

Achievements 

In view of these promises, it may be of some interest to consider 
what has happened since 1952 to the farm population. 

In 1952, gross private farm income was $22.8 billion; the average 
for the years 1953-1958 was $20.3 billion, or roughly 11 per cent 
less than in 1952. In the same period, gross national product rose 
by 16 per cent, suggesting a very serious deterioration for farm 
income. For net income the reduction for the period 1953-1958 over 
314 



Agricultural policy 315 

1952 was 15 per cent. Farm proprietor income suffered even more. 
Thus from 1952 to 1960 this income dropped by 21 per cent 
whereas national income rose by 44 per cent, or a relative decline 
of close to one half. 

What about parity, the relation of prices received by farmers to 
prices paid by farmers (1909-1914 = 100)? The President had 
promised not 90 per cent but 100 per cent of parity for farmers 
and a full share of income. In 1952, parity was at 100. ( The average 
for 1946-1952 was 106. ) For 1956, it was down to 82, and by 1960 
it was at 80. The average for eight Eisenhower years was 84y> . 

In December, 1952, the commodity inventories held by the CCC 
were $1.1 billion. By June, 1958, they had risen to $5.5 billion. 1 

The Budget shows that expenditures for agriculture and agri- 
cultural resources rose from an average of $1.5 billion in fiscal years 
1951-1953 to $4.4, $4.9, $4.5, $4.4, $6.8 (estimated), $6.0 (estimated) 
and $5.6 (estimated) in fiscal years 1955-1961. 

Of course, the major increase in cost was for stabilization of 
farm prices and farm income. But it is of some interest that the 
government in its early years spent less on rural electrification and 
rural telephones than the Democrats had and, despite strong prom- 
ises to stimulate conservation, actually cut expenditures on conser- 
vation in the first three years of the administration, but began sub- 
stantial increases only in fiscal year 1957, as part of the Soil Bank 
Program. The government did keep its promise of substantial in- 
creases in research expenditures, though not until the fiscal year 
1955. 

In his Budget Message of 1960, the President estimated that the 
loans and commodity inventories of the Commodity Credit Corpora- 
tion, which were $7.1 billion on June 30, 1958, would rise to $10.5 
billion by June 30, 1960. His 1962 Budget revealed expenditures of 
$3.4 billion for stabilization of farm prices and incomes as com- 
pared with less than an average of $2 billion in 1953 and 1954. 
Outlays for conservation also increased greatly. 2 

It is clear that President Eisenhower did not succeed in fulfilling 
his promises. The farmers have not shared in the rise of income since 
1952, nor did the farmer get 100 per cent of parity or anything near 
it. In fact, Eisenhower and Benson strove to reduce guarantees 
much below 90. And despite government determination to cut the 
large expenditures for the farm program, the program continued to 
cost increasing amounts of money. 



316 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

In the 1952 campaign, the President time and again promised 
that he would provide price support for perishable commodities: 
he did not see why the government should concentrate its support 
on the basic commodities. In his 1959 Message on Agriculture, the 
President said: "Three of the twelve mandatory products (wheat, 
corn and cotton) account for about 85 per cent of the federal in- 
ventory of price supported commodities, though they produce only 
20 per cent of the total cash farm income." 

He also pointed out that 90 per cent of the expenditures for price 
support of wheat resulted from the production of about one half 
of these farms, the largest ones. 

Despite his famous campaign promise at Kasson to find a method 
for supporting perishable commodities such as livestock, at a press 
conference early in 1956 he said: "I would believe that to go in this 
whole perishable field and begin the business of price support would 
be dangerous. I would want to study it more before committing 
myself definitely on it." 

Nor is it clear that the Rural Development Program has made 
very much headway in helping the farmers interested in perishable 
commodities and the small farmers, whose economic status is serious 
indeed. On the whole, the farm program from a long time back 
has tended to concentrate on the relatively well-to-do farmers and 
has not tended to help the low-income farmers, the tenant farmers, 
the sharecroppers, the migratory workers, and so on. 3 

It is well known that, despite his promise of 90 per cent or even 
100 per cent of parity, the President supported Benson, who was 
determined to get supports below 90 per cent. In 1954 and again in 
1956, 1958 and 1959, Benson moved away from firm supports. 

The Clash of Parties on Agricultural Policies 

President Hoover sought to support farm prices by purchasing 
supplies, but his Federal Farm Board discovered that this policy 
would not work without control of output. President Roosevelt, in 
setting minimum prices and controlling output, devised a far more 
effective farm policy, but problems remained. While farm incomes 
rose greatly in the Democratic period, undoubtedly the war con- 
tributed more to this than did agricultural policy per se. Neverthe- 
less, the Democrats did establish the point that the farmer required 
protection against the powerful forces of the market. What made a 
successful policy difficult was that it was not easy to enforce restric- 



Agricultural policy 317 

tion of output as the condition for higher prices. Acreage control 
tended to result in more intensive cultivation and higher output 
per acre. The great advance of technology in recent years is per- 
haps one of the most important explanations of the failures of farm 
policy. As for marketing control, this required regimentation and 
even espionage, both naturally distasteful to the farmers. 

In general, the Democrats have supported firm supports and 
still do. Some Democrats now advocate production payments along 
the lines of the Brannan Plan, by which farm prices would find their 
own level on the market, but the farmer would be reimbursed with 
the difference between the market price and a fair price. 

Another difference between the Democrats and the Republicans 
on farm policy stems from ideology. Republicans, of course, want as 
little control from Washington as possible; and they want free 
markets, with some exceptions (for example, in nonferrous metals 
and oil). The Democrats, on the other hand, hold the view that 
the only way to deal with the farm problem is to have some control 
of supply and also to provide minimum prices and incomes. If this 
program is not to cost astronomical sums, it is important that there 
should be some control of output. But in this great technological 
age this control of output becomes very difficult indeed. 

Typical of the Republican viewpoint on the issue of farm policy 
is this quotation from a speech by True D. Morse, Under Secretary 
of Agriculture: ". . . It is possible through individual and group 
action to solve many problems and achieve objectives locally with 
a minimum of federal assistance and control." 4 

One of the main differences between the two parties is that 
the Republicans seem more disposed to urge the farmers to get off 
the farms and go into the city. Throughout the literature of the Eisen- 
hower administration, there appears the correct view that the small 
farms are unproductive and the larger ones are more productive. In 
order to solve the problem of excess output it would be necessary to 
get rid of many of the small and unproductive farms, and this 
might even include some of the larger farms, because the small 
farms do not provide a large part of the total output. In this con- 
nection, note that the Soil Bank Reserve Plan, which cost $620 mil- 
lion in fiscal 1958 and $700 million in 1959, was abandoned, in large 
part because the effects were primarily to ease out the small farmer. 
Not only did the program prove to be very costly, but it discrim- 
inated against the small farmer. Farming is a manner of life, and 



318 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

many of the Democrats, including some of the leading Democratic 
politicians, were opposed to any policy directed toward getting 
the farmers off the farm. This was made very clear by Senator 
Sparkman and Congressman Mills, two of the leading members of 
Congress. 5 

Summary 

The agricultural problem is not solved. Firm support prices 
have not been wholly successful, but they at least have helped 
keep farm incomes up. The major difficulty has been controlling 
supplies, a problem that has been aggravated by the great techno- 
logical advances and the tendency of the farmers to shift to un- 
controlled products as controls are introduced. 

On the basis of experience since 1954, faith in the flexible sup- 
ports and the free market should not be great. At least, the evidence, 
as given by the prices received by farmers, their fall of income, 
growth of inventories, and the large rise of cost for the government, 
suggests that flexible supports have been even less successful than 
firm supports. Indeed, the market has been expanded to some 
extent by dumping abroad; but this, in turn, raises certain problems 
of international relations. We still have not solved the problem of 
helping the poor farmers, the really submerged members of the 
agricultural communities, and we have yet to learn how to deal 
with the problem of perishables and to prevent the concentration 
of help on a relatively small percentage of all output and largely on 
the high-income farmers. Any policy that forces the farmer to aban- 
don his farm, even if savings on the federal budget are substantial, 
is not necessarily the best public policy. 



35. Kennedy's farm policies 



Kennedys Appraisal of Republican Policies 

Undoubtedly the Republicans were unfortunate in their farm 
policies. The results were dismal: a large decline of farm income in 
a period of rising incomes; an accumulation of $9 billion of inven- 
tories, mostly in the Eisenhower years; a soil bank plan which pri- 
marily tended to force small farmers to get rid of their farms; and 
a failure to keep promises of extending price supports to perishable 
commodities and of providing 100 per cent of parity. In addition, 
Kennedy criticized the administration for selling large amounts of 
nonfat dry milk at one fifth the market price to feed manufacturers 
instead of using it to improve the nutritional standards of the nation. 1 

In addition to these points, Kennedy was critical of Nixon's 
program. He wanted to know why, if Nixon was now in favor of con- 
servation, he had voted numerous times against conservation pro- 
grams; and in his views the Nixon conservation program was Ben- 
son's old soil bank program, even to the extent of using the same 
words: "We shall use surpluses to get rid of surpluses." 2 

Yet it would be unfair to hold the Republicans wholly respon- 
sible for the unfortunate results of farm policy. Indeed, Benson 
was rigid in his support of the free market, and he was slow in 
discovering new markets. But surely the great technological ad- 
vances of the period contributed greatly to the large surpluses, and 
for this neither Eisenhower nor Benson could be held responsible. 

In many respects the Nixon and Kennedy views on farm policy 
were in agreement. They both sought some kind of parity for farm 
income. They both wanted to get rid of the large surpluses over- 
hanging the market, both to save storage charges and to protect 
prices. They both would increase domestic demands through nutri- 

319 



320 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

tional programs and accumulation of strategic reserves at home, and 
would enlarge markets abroad. Kennedy in particular would greatly 
expand the Food for Peace program. They both would try to im- 
prove the economic status of the low-income farmers. 3 

Yet the Nixon and Kennedy programs differed in important re- 
spects. First, the Republican program was vague on the specific 
methods of supporting prices and income. In part this is explained 
by a desire to reduce governmental influence. The platform had 
this to say: 

The Republican Party pledges itself to develop new programs to 
improve and stabilize farm family income. It recognizes two main chal- 
lenges: the immediate one of utilizing income-depressing surpluses, 
and the long-range one of steadily balanced growth and development 
with a minimum of federal interference and control. 4 

In contrast, note the Democratic platform: 

... to bring about full parity income for farmers in all segments 
of agriculture . . . 

Measures to this end include production and marketing quotas meas- 
ured in terms of barrels, bushels, and bales, loans on basic commodities 
at not less than 90% parity, production payments, commodity purchases, 
and marketing orders and agreements. 5 

In his message to the Congress on agriculture, President Ken- 
nedy further amplified his views and those of his party. The rela- 
tion of farm income and that of other segments of the nation had 
been a Democratic argument for high support prices for years. 
Kennedy also pressed this point. The farmers spend $40 billion a 
year, he noted, and this greatly helps the economy. 

The Secretary of Agriculture has authority to set and adjust the 
level of support prices, set the level and terms of loans, prescribe 
acreage allotments, specify conservation payments, establish market- 
ing agreements and orders, and take other steps to adjust supplies 
and protect the prices and incomes of farmers. 6 

Kennedy would go further; he would amend the Agricultural 
Marketing Agreement Act of 1937 so that marketing orders could 
be used for a wider range of commodities, make it more flexible in 
dealing with commodities for which a national or area program 
may be devised. ". . . This will enable the valuable tool of the 



Kennedy's farm policies 321 

marketing order to be extended and combined with effective pro- 
duction control/' 7 

Here is the nub of the Kennedy program: comprehensive use of 
techniques, high support prices and incomes for farmers, but to be 
accompanied by vigorous production controls. In the absence of the 
last, the costs of high support prices become excessive. It remains 
to be seen whether the farmers will support a program that gives 
them both satisfactory prices and serious control of output. Under 
Roosevelt they reacted violently against vigorous production con- 
trols. Kennedy was impressed by the satisfactory incomes of to- 
bacco farmers who profited from high prices but agreed to effective 
marketing control. The feed grains legislation introduced early in 
1961 to deal with a serious saturation of supplies and inadequate 
storage provided a high support price, but only on the condition 
that acreage be reduced. The 1961 farm legislation passed by the 
Senate also yields a higher support price for both wheat and corn, 
but also substantial cuts in acreage, which it is hoped will save the 
government money. 8 

Whereas Nixon criticized the Democratic program on the 
grounds that the effect would be a 25 per cent rise of food prices — 
eggs would cost 28 cents a dozen more * — Kennedy criticized the 
Nixon program — Operation Consumption and Operation Safeguard 
— on the grounds that the control prices would be tied to last 
year's market prices and hence would tend downward. Kennedy 
would tie prices to parity. 9 

The farm programs reflect to some extent the differences in 
ideology and economics of the parties. But despite Nixon's charge 
that Kennedy's program would cost $10 billion more per year, the 
Kennedy budget for F.Y. 1962 was $658 million in excess of Eisen- 
hower's farm budget, and the differences were largely explained 
by Eisenhower's low estimates. 

In his Budget Address of March 24th Kennedy said: "The earlier 
[Eisenhower] Budget [for 1962] based its estimates on the assump- 
tion that price supports on every major commodity would be re- 
duced to the lowest level permitted by law — reductions which were 
never formally recommended by the then Secretary of Agriculture, 

* Kennedy's reply was that Nixon's estimate could not stand up when 
one considered the small proportion of the consumers' price that goes to the 
farmer. F.C. I, p. -437. Nixon's criticisms at times went to absurd levels. He 
said, for example, that the Kennedy farm program would cost $10 billion 
annually more than the Nixon program. F.C. II, p. 502. 



322 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

which would never be permitted by the Congress and which would 
have been absolutely ruinous to our farm economy. . . ." 10 

Democrats are much more disposed to improve the status of the 
farmers, a low-income group on the whole, and also to extend con- 
trols, than are the Republicans. But under the pressure of Benson's 
failures, Nixon was prepared to provide at least temporary high sup- 
ports and ultimately, like Kennedy, bring supply and demand in 
equilibrium. Nixon's proposals were closer to Kennedy's than were 
the actual policies of Eisenhower and Benson. But there still re- 
mained substantial differences between Nixon and Kennedy. Only 
the future will tell whether farm income can be kept up without 
excessive cost to government and consumers, and that will depend 
upon whether the farmer will accept production controls as the price 
of high supports. Results for 1962 are not too pleasing for the Ad- 
ministration of President Kennedy. Stabilization expenditures are 
estimated at $4.7 billion in F.Y. 1962 as compared with $3.5 billion 
in F.Y. 1961. But this is far from Nixon's prediction of excess costs 
by $10 billion per year under Kennedy. 



Part VIII 



EXTERNAL ASPECTS 



36. International economics 



^ In general, President Eisenhower's views on international eco- 
nomics are more nearly like those of the Democrats than those of the 
Republicans. The latter have had a long history of protectionist 
sentiment, a fact that explains Eisenhower's failure to discuss tariff 
and similar problems in his 1952 campaign. Throughout his admin- 
istration he had difficulty in putting across his views on trade to 
his Republican colleagues. 

Governor Stevenson early saw the possibility of attacking the 
Republicans on their divided views on trade. In a speech in Cali- 
fornia on September 9, 1952, the Governor said: 

I don't think even the Republicans will try to take credit for the 
reciprocal trade agreements program. Certainly, the old guard won't. 
It has been trying to wreck that program every time it comes up for 
renewal, as it does again next year. 

I could go on talking of Republican attacks on our assistance pro- 
grams. . . . 

Indeed, Governor Stevenson's forecast was pretty well carried 
out, because the President did have great difficulty in getting ex- 
tensions of the reciprocal trade agreement and adequate mutual 
security programs. The Congressional Quarterly puts together a 
number of crucial votes on reciprocal trade for 1945, 1949, 1951, 1953 
and 1955. In every instance, the Democrats voted in favor of the 
liberalization program. For example, in 1955, Congressman Reed, 
a Republican and leading protectionist, on a motion to recommit 
the Trade Agreements Extension Bill, was defeated. The Democrats 
voted 84 for and 140 against, and the Republicans, 119 for and 66 
against this protectionist move. 1 

325 



326 ]0 THE ECONOMICS OF THE POLITICAL PARTIES 

On the Mutual Security Act of 1955, on a crucial vote to make 
50 per cent of the funds appropriated for economic development 
available only on a loan basis, the Democrats voted 29 to 11 against, 
the Republicans, 22 to 21 for. 2 

In general, President Eisenhower supported a program of trade 
liberalization. In 1953, in 1955 and in 1958 he proposed extensions 
of the Reciprocal Trade Agreement and cuts in the tariff. Generally, 
he had to be satisfied with less than he asked for and largely be- 
cause of failure to get Republican support. 3 

It could also be said on behalf of the President that he tried 
harder to get through his international economic legislation than 
most of his domestic policies. 

In a speech on the Senate floor, on February 3, 1958, entitled 
"Why a Meaningful Extension of the Reciprocal Trade Act and 
Membership in the OTC Should Be Passed by the Congress," Sen- 
ator Douglas had this to say: 

In a speech on the floor of the Senate two years ago, I gave the melan- 
choly record of the President in connection with the [Tariff] Commis- 
sion. Thus, he appointed a long-tested protectionist as Chairman of the 
Commission, and a professional tariff lobbyist as Vice-Chairman. Two 
of the three other members who have been appointed by the President 
are . . . protectionists. The staff has been filled with men who follow the 
official protectionist line. The Commission, therefore, has a built-in bias 
aganist freer trade and lower tariffs, and shows this in their recommenda- 
tions to the President under the Escape Clause. . . . 

This does suggest that perhaps, in the views of many, the Presi- 
dent was not putting up the best possible fight for liberalization 
of trade. 

Eisenhower appointed three important committees to deal with 
the general problems of international economics, the Fairless, the 
Randall, and the Draper committees. It is also of some interest that, 
on the whole, the committees appointed in the earlier administra- 
tion — the Taylor, Rockefeller, Gray, and Bell committees — tended 
to take a much more liberal view toward trade than did the impor- 
tant Randall Committee. Many were critical of the last for its weak 
recommendations on liberalization of trade. 

There is little evidence that President Eisenhower made much 
use of the work of these committees. Very little happened after the 



International economics 327 

Randall Committee issued its report. The Fairless Committee gave 
the approval of businessmen that some substantial foreign aid pro- 
gram was necessary. The Draper Committee in 1959 stressed es- 
pecially the need of increased appropriations for military aid, since 
the large backlog from former appropriations had for the most part 
been used. 4 

Criticisms of the Eisenhower Program 

Perhaps the first criticism that can be made of the Eisenhower 
administration is the drastic decline in foreign aid when the ad- 
ministration came in. The decline for economic aid was especially 
large. In fact, there was a significant shift from economic to military 
aid, and, if anything, military aid tended to rise. In fact, from 1950 
to 1952 military spending abroad averaged $1.3 billion and nonmili- 
tary $2.9 billion; from 1953 to 1958 the respective figures were $2.7 
and $1.9 billion. 5 

In general the Eisenhower administration recourse to aid has 
not been adequate. Undoubtedly the largest part of the explanation 
is the unwillingness to spend money, and of course related is the 
influence of the isolationist members of the Congress, who are more 
numerous in the Republican than in the Democratic party. In fact, 
one might argue that the President concentrated too much on getting 
the reciprocal trade agreements to provide additional dollars for 
foreign countries in the long period of dollar shortage. It does not 
mean that liberalization of trade was not a proper part of our gen- 
eral foreign policy, for it was. But if too much emphasis is put on 
the amount of spending, then the administration tends to emphasize 
too much the need of providing dollars through increased imports 
and puts an inadequate emphasis on the provision of dollars through 
increased loans or grants. Obviously, if the objective is to maintain 
good relations with our friends, then the whole burden should not 
be put upon the vulnerable import-competing industries, but part 
of the burden should be put upon the taxpayer, who represents all 
of America. 

Let me explain this problem. Foreigners were short of dollars. 
Then what could be done? They could obtain more dollars by sell- 
ing more here, by capturing our export markets, by borrowing here 
or more generally importing capital from dollar countries, or by ac- 
cepting loans or gifts from the United States government. But it 



328 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

should be clear that in wartimes and during the postwar crisis 
through 1951 or so, large exports of United States goods were essen- 
tial. 

In general, the President's policy of trying to get more import 
trade is certainly to-be supported. But it should be noted that the 
important factor, much more than reduction of tariffs, that makes 
for more import trade is the increased income of the nation. One 
has only to compare the experience in the 1930's, when tariffs were 
drastically cut, and in the first ten years after World War II, when 
there were significant but not very large cuts in tariffs, and consider 
what happened to trade in both of these periods. Of course, the very 
large increases were in the post- World War II period and not in the 
1930's, and the explanation is the much larger rise of income in the 
1950's. In so far as the administration failed to keep income from 
rising more, they contributed to less trade. 

The Eisenhower administration, in not taking into account the 
varying capacity to tolerate increased imports as a result of gov- 
ernmental policies, also failed in its international trade policy. The 
policy of the government in general has not been to differentiate 
between weak and strong industries. In an economy that is growing 
rapidly, the administration could easily put the burden of increased 
imports to a greater extent upon the strong industries, which could 
accept the increased competition out of rapidly rising markets, with 
very little adverse effects on them, and perhaps prevent an inunda- 
tion of markets for the weak industries. Just to give one example: 
in 1948 under the Geneva Protocol, the tariff on woolens was cut by 
45 per cent. In the next eight years, the woolen industry lost 50 per 
cent of its jobs. Yet the President took no action until just before 
the election in 1956 to make adjustments in the Geneva Protocol, as 
had originally been provided in the treaty. Hence, if it is agreed 
that the general policy should be more trade and that this increase 
in trade should come partly out of reduced tariffs, there is the ques- 
tion of how this burden should be distributed. In this sense, it is 
usually the Republican administration's tendency to favor the strong 
growing industries and to put the pressure on the weak industries. 

Another and more subtle criticism may be made of the Eisen- 
hower administration's trade policies. Lack of interest of Republi- 
cans in planning is relevant here. There was no attempt to recon- 
cile the tariff policies with other policies that were affecting regions 
or industries. For example, if one industry or region suffers as a 



International economics 329 

result of federal policy, say through high-price agricultural policies, 
through tax programs that tend to favor their competitors, through 
government credit policies resulting in increased spending in other 
areas and through abuses of tax-exempt privileges that allow com- 
peting areas to obtain capital without a fair tax burden — then tariff 
policy should not be treated in isolation. Where large injuries are 
done through federal policies in one region or one industry, or sev- 
eral regions or several industries, then tariff policy should take this 
fact into account. Here the criticism relates to Congress as much as 
to the administration. 

In some instances, the President yielded to protectionist measures 
when he probably should not have. A good example of this is the 
quotas on oil imports. The results of the quotas are higher prices 
for oil and quicker exhaustion of our limited resources, whereas 
continued large imports would save our resources and result in 
lower prices for the oil consumers. After all, this is an industry which 
is growing rapidly and has been, on the whole, a very profitable 
one. It is difficult, indeed, to justify any strong restrictionist poli- 
cies on the importation of oil, particularly if one considers the prob- 
lem in the broader context of governmental policy. TV A quite 
rightly brought down the price of power for the South and gave the 
South certain advantages. This is not to be regretted. But is it sound 
policy, therefore, to put a ban on oil imports and raise the price of 
oil, which is used so largely in the Northeast where costs of power 
are so high? But the important point is that this policy brings 
extravagant use of our resources, especially since Canadian oil 
resources are beginning to be of such great importance and these 
sources of supply are not going to be lost to us in case of war. 



37. Kennedy on 

international economics 



The Dollar Problem 

In the years 1958-1960, the United States lost $11 billion in gold 
and accumulation of short-term dollar debt to foreign countries. 
Hence the President faced a very serious problem in 1961, for the 
government, in pursuing policies to treat the recession and maximize 
employment and growth, had to watch the balance of payments. 
An administration that had been very critical of Republican restric- 
tive monetary policies and was committed to expansive fiscal and 
monetary policies now had to take into account the effects of ex- 
pansion at home on the balance of payments and gold reserves. 
Rising monetary supplies and spending tend to increase imports and 
reduce exports; for prices at home tend to rise relative to movements 
abroad. The Eisenhower administration, fearful of inflation and 
budgetary deficits, seemed almost to welcome the support to be 
had for restrictive monetary policy and a balanced budget from 
the deterioration of the dollar position. 

Losses of gold and doubts about the dollar became a political 
issue in the campaign of 1960. In a speech to businessmen on Octo- 
ber 12th, Senator Kennedy commented on the dollar problem, em- 
phasizing especially the need of an improved competitive position, 
which would yield an increased export balance. 1 

Quoting the Times of London, Vice-President Nixon on October 
24th said that the dollar "has hardly benefited from the implication 
throughout Mr. Kennedy's election campaign of higher government 
expenditures." The weakness of the dollar was associated with 
Kennedy's attack on the independence of the Federal Reserve and 
his free-spending policies. 2 
330 



Kennedy on international economics 331 

Within a week, Kennedy replied to these charges. He would 
not devalue the dollar. He was critical of Eisenhower for failing 
to achieve larger markets for our goods abroad and for not putting 
a greater part of the burden of defense and aid on foreign countries. 
Inflation under Eisenhower, and especially of steel prices, contributed 
to the loss of gold. Despite numerous warnings, the President "failed 
to take prompt and vigorous action, and the balance of payments 
continued to go against us." To correct the situation, Kennedy would 
depend more on fiscal policy, and hence less on monetary policy 
(that is, higher money rates), which tends to interfere with growth. 
Budgeting, appropriate wage and price policy and plant moderni- 
zation are all conditions for an improved balance of payments. 3 

To what extent could the Eisenhower administration be blamed 
for the unfortunate developments in the dollar market? In so far 
as they were responsible for inflation, the Eisenhower administra- 
tion might be criticized. But in fact the record on inflation was not 
bad, and probably the Democrats would not have had a better 
record on this score. In fact, the loss of markets abroad was not so 
serious as many believed. Indeed Europe had gained on the United 
States in the later 1950's, but the explanation was not so much 
inflationary price and wage policies here as the rising productivity 
in Western Europe associated with the inflow of United States 
capital and technology, the rising output (and lower unit costs) 
and the increasing size of markets ( and hence lower costs ) related 
to the Common Market. As a matter of fact, the loss of markets 
by the United States in 1958 vis-a-vis 1954-1956 was surprisingly 
small and especially when allowance is made for the losses tied to 
the relatively slow growth of markets in which the United States 
was interested. The adverse balance of payments was associated 
more with the large commitments for defense, aid and private 
capital movements, these not yielding a corresponding excess of 
exports. Large losses of short-term capital were tied to the underly- 
ing relative weaknesses here, which might be listed as the recovery 
of Europe and Japan, the heavy commitments on aid and defense 
and capital exports from the United States. 4 

To some extent, however, the Eisenhower administration should 
be held responsible for the dollar crisis. First, they were very slow 
in taking corrective measures. Losses of reserves on a large scale 
had been going on for about two years* before the administration 
stopped the practice of preference to off-shore purchases, that is, 



332 }0i THE ECONOMICS OF THE POLITICAL PARTIES 

use of defense and aid dollars to purchase abroad. The policy of 
tied loans, that is purchasing at home, was also very slow in evolv- 
ing. Other errors were the failure to press more vigorously for trade 
concessions for American exports. Despite a reversal in the balance 
of payments that continued for years, trade policies were adjusted 
slowly. What was required was not the relative increase of restric- 
tions abroad, the appropriate policy in the first five to ten postwar 
years, but a relative increase of restrictions in the United States. 
This should have been achieved by removal of quotas against 
United States goods and protection of our position in the Common 
Market. 

Another failure relates to the continued sales of dollars to the 
International Monetary Fund (IMF) in this period when the ad- 
verse balances abroad should have been treated by sales of other 
currencies. Dollar availability to the IMF further weakens the dol- 
lar. Nor had the administration really pressed soon enough or hard 
enough for increased contributions by surplus countries to financ- 
ing foreign aid and defense. Finally, it was not until after the elec- 
tion, that the President made the first comprehensive survey of the 
dollar problems, with suggested therapy, including the ill-fated pro- 
posals to bring families of soldiers back to the United States. The 
emphasis had been largely on expanding trade through rising credit 
and insurance, and increasing tourist travel. But the emphasis on 
tourist travel, both by the Eisenhower and Kennedy administrations, 
is scarcely justified. Tourists do not travel with ease from European 
countries with a $1,000 per capita income and corresponding prices 
for services, to a country like the United States with a $2,500 per 
capita income. 5 

In the first half of 1961, the United States balance of payments 
greatly improved. On February 6th, only seventeen days after the 
inaugural, the President issued his Balance of Payments Message. 
This was, without a doubt, the most able statement of the problem 
yet made. 6 The President dwelt on the causes of the crisis, the 
contributions that might be made by other friendly nations to their 
solution and on the monetary, fiscal, price, wage and investment 
policies that would improve our trade balance. Aside from the usual 
measures, the President asked consideration of a segmentation of 
markets, with higher rates for deposits of foreign official balances 
a means of holding foreign capital; programs for increasing inter- 
national liquidity so that deficiencies of liquidity would not induce 






Kennedy on international economics 333 

deflation; the possibility of removing United States gold reserve 
requirements so that a large part of our gold reserves would not be 
tied up; and finally an examination of the taxes on foreign capital — 
with the implication that favorable tax treatment leads to excessive 
capital exports from this Country. 

This message, with assurance of domestic policies appropriate 
for a safe dollar, assured the world that devaluation was not on the 
agenda, and that the United States would remain competitive through 
orthodox means. The great decline in short-term capital movements 
could be related to these assurances, as well as to the measures 
taken by the United States to depress long-term rates (as a cure 
of recession) and yet moderating the decline in the short-term rates. 
Excessive declines in the latter bring outward movement of capital. 
Progress with tied loans, pressure on other countries to share in aid 
and defense, further trade concessions abroad, the German revalua- 
tion, increased cooperation of central banks and the IMF to share 
the demands on international liquidity — all these helped in 1961. 

The Congress so far has not accepted the President's proposals 
for increased taxes on foreign subsidiaries. But the restraints on do- 
mestic policies originating in the adverse balance of payments are 
considerably less than in I960. 7 In 1961, the deficit is down by about 
one half from the 1958-60 average. 

Foreign Aid 

Senator Kennedy, in a speech to the Senate of March 25, 1958, 
urged a much larger contribution to foreign aid, and notably to 
India: "It is absolutely imperative that the Western nations and 
India keep their gaze on and summon their efforts to the achieve- 
ment of the broad goals and the type of over-all scheme envisaged 
originally in the Second Plan [India]." Stressing the possibility of 
communist gains in the East and the contribution of foreign aid to 
the employment problem in the United States, Kennedy urged larger 
contributions to foreign aid and especially long-range aid. 8 

In the campaign Kennedy time and again harped on the need 
of an adequate foreign aid program. Among the points he stressed 
were the following: the unfortunate delays in a program for Latin 
America; the need of capital, surplus food and technical aid for 
the underdeveloped countries; long-term loans at low rates of in- 
terest; and regional plans worked out by the industrial and under- 
developed countries. "Our purpose* is not to buy friends or hire 



334 }0> THE ECONOMICS OF THE POLITICAL PARTIES 

allies. Our purpose is to defeat poverty . . . and our goal is to again 
influence history instead of merely observing it." 9 

Nixon was strangely silent on the issue of foreign aid. At the 
outset of the campaign he praised Eisenhower for the Latin Ameri- 
can aid program. 10 But after that he did not discuss foreign aid. 
( In fact, his discussion of international economics was limited to this 
comment and the October attack on Kennedy for the gold loss.) 
His silence undoubtedly reflects the strong isolationist and contra- 
spending sentiment in his party. To Eisenhower's credit, it should 
be said that he supported and fought for aid; but the trend of 
economic aid was downward under the Eisenhower administration 
even as the need with the communist trend increased. From $1,937 
million in F.Y. 1953, it declined to $1,511 million in F.Y. 1954, and 
then rose to $1,934 million in F.Y. 1961. In a period of rising interna- 
tional tensions and an increase of gross national product of 40-50 per 
cent, economic aid had not changed significantly (net) except for 
a large rise in F.Y. 1959. In the Eisenhower years the totals were 
generally below the 1953 level. 11 

Once Kennedy was in control, his policies reflected the views he 
had presented in the Senate and in the campaign. In his message on 
Latin America of March 14, his message on Foreign Aid Programs 
of March 22, and his letters to Congress of May 26, 12 President 
Kennedy again urged integration of plans by those giving and those 
receiving; cooperation by the recipient countries — land reforms, 
improved tax structure, and so forth; separation of military and 
economic aid and greater emphasis on the latter; a preference for 
loans as against grants through terms, both maturity and rates of 
interest, adjusted to capacity to pay, and amounts adjusted to ca- 
pacity to absorb — that is, state of development; and an integration 
of foreign aid programs, then administered by several agencies, 
under one head. 

In seeking long-term loans, the President was confronted with 
the greatest opposition. This involved back-door financing, that is 
borrowing from the Treasury and by-passing the Appropriations 
Committees of Congress. But as Secretary Dillon pointed out, more 
than $100 billion of financing since the early thirties had been in- 
curred through back-door financing. 13 

In general, Kennedy's program in 1961 reflected well his ex- 
pressed views in 1958-1960. His request for appropriations for 1962 



Kennedy on international economics 335 

was equal to Eisenhower's. But for later years the amounts would 
be larger. The President's advance over Eisenhower was evident 
in the quality of the plans presented to the Congress, the stronger 
pressures put on the Congress to get approval, the relative decline 
of military aid, the demands on other individual nations to con- 
tribute, a shift of emphasis from grants to loans, greater stress on 
the contributions and policies of the recipient countries, and con- 
centration on a few crucial countries. 

In one respect, the program may seem disappointing. The 
amounts proposed might have been larger. Here, however, the dol- 
lar problem is somewhat of a deterrent: fear of pressure on the 
dollar restrains both the amount of aid and the size of the budgetary 
deficit. Yet since the loans are tied, a somewhat larger appropria- 
tion might have been justified — though here Congress might well 
be an obstacle. 

Trade Policy 

President Eisenhower favored a liberalization of trade barriers 
and expansion of trade. But he was embarrassed by the protec- 
tionist traditions of his party and he was hampered by a rising pro- 
tectionism in the South. In general, he withstood the onslaughts of 
the protectionists, for he usually vetoed attempts of the Tariff Com- 
mission to give relief — that is, raise trade barriers — under the Escape 
Clause. But somehow his appointments to the Tariff Commission 
tended to make that organization more protectionist. In contrast, 
President Kennedy's first appointment to the Tariff Commission was 
Ben Dorfman, a civil servant with strong leanings toward free trade. 

Eisenhower's difficulties are well suggested by the following: 
Secretary Humphrey apparently was not enthusiastic about in- 
creased imports from Japan; for Japanese imports were hurting 
the Pittsburgh electrical industry. The President asked whether 
businessmen might not make some sacrifices. "No," Humphrey said 
candidly, "the American businessman believes in getting as much 
as he can while the getting is good." 14 

In the campaign, Kennedy assured the textile industry that he 
would not allow the industry to be driven to the wall by excess 
imports, and he would use all available weapons to save the in- 
dustry. 15 As a senator, Kennedy had watched with dismay the 
textile industry in Massachusetts lose two thirds of its jobs since 



336 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

the War. Although he was committed to expanding trade, he could 
also envisage the responsibilities of the government in preventing 
chaos from developing as a result of floods of imports. 

On August 31, 1960, the Senator sent a letter to Governor Hol- 
lings of South Carolina: 

I agree with the conclusions of the Pastore Committee that sweeping 
changes in our foreign trade policies are not necessary. Nevertheless, 
we must recognize that the Textile and Apparel industries are of inter- 
national scope and are peculiarly susceptible to competitive pressure 
from imports. Clearly, the problems of the industry will not disappear 
by neglect nor can we wait for a large scale unemployment and shut- 
down of the industry to inspire us to action. A comprehensive industry- 
wide remedy is necessary. 

The outline of such a remedy can be found in the report of the Pastore 
Committee. Imports of Textile products, including apparel, should be 
within limits which will not endanger our own existing textile capacity 
and employment, and which will permit growth of the industry in rea- 
sonable relationship to the expansion of our over-all economy. 

The Office of the Presidency carries with it the authority and influ- 
ence to explore and work out solutions within the framework of our 
foreign trade policies for the problems peculiar to our Textile and 
Apparel industry. Because of the broad ramifications of any action and 
because of the necessity of approaching a solution in terms of total needs 
of the textile industry, this is a responsibility which only the President 
can adequately discharge. I can assure you that the next Democratic 
Administration will regard this as a high priority objective. 16 

On May 2, 1961, the President called for an expanded textile 
research program administered by the Department of Commerce, a 
revision of depreciation allowances on textile machinery, small 
business administration and financial assistance for equipment mod-, 
ernization, elimination of offsetting two-price cotton cost differen- 
tials, legislation to provide Federal assistance to industries threat- 
ened by increased imports, and an international conference of 
textile importing and exporting countries to seek understanding on 
avoiding disruption to established industries and a careful consider- 
ation of its merits and application to the textile industry for action 
under the existing statutes, such as the Escape Clause of the Na- 
tional Security Provision of the Trade Agreements Extension Act. 

It will be noted that the President did not come out for a quota, 
though there certainly is a possibility of voluntary quotas worked 



Kennedy on international economics 337 

out with countries that are inundating our market. It is also possible 
that under the National Security Provision of the Trade Agreements 
Extension Act the industry may get some help on the grounds that 
in the absence of quotas the industry would decline and endanger 
our necessary supplies of materials in wartimes. 

The President, of course, was in a very difficult situation. He 
was very anxious to help the industry and realized that no admin- 
istration could allow an industry to be destroyed without the gov- 
ernment taking action. On the other hand, it has been the policy 
of the United States Government for a long time to try to expand 
international trade as part of its general security program. There had 
never really been quotas put on manufactured goods before and 
the introduction of quotas by a Democratic administration may 
have serious repercussions abroad. This concerns the government. 

By July, 1961, agreements had been reached among interested 
countries to prevent imports into industrialized countries that would 
seriously damage the established textile industries in advanced 
countries. 17 

In December, 1961, the President announced a new departure in 
trade policy. In order to penetrate the growing Common Market in 
Western Europe, he would ask Congress for the right to negotiate 
across-the-board tariff cuts, and much larger reductions than in the 
past. It remains to be seen how far Congress, increasingly protec- 
tionist in the post-War period, will go along. 



Part IX 

CONCLUSIONS 



Conclusion: the conflict of parties 



^ Public policy is an expression of the vision of the future. Both the 
Republican and Democratic parties have an idea of the kind of eco- 
nomic future they want for America, and their present policies are 
the deductions from these conceptions of the future. We have con- 
sidered the policies in one area after another of economic activity. 
Now let us add them up and consider what they imply for the future 
of the American economy. 

The Republicans are less disposed than the Democrats to stress 
the need of large growth. At least through 1960 they seemed to fear 
growth at high rates, because they consider it more important to 
stop inflation than to stimulate growth. Accordingly they would be 
satisfied with a small growth rate, and they would ensure this and 
at the same time fight inflation (in their view) by imposing high 
interest rates — say, currently (1961) in the neighborhood of 4-5 
per cent. For the same reason, they would favor cutbacks in gov- 
ernment spending and, if possible, an annually balanced budget. 
(The irony is that these policies — small growth rate, high interest 
rate, government retrenchment — are no guarantee against inflation, 
as the years 1955-1958 showed; while the fiscal year 1959, with 
a $12.5 billion budget deficit, exhibited, contrary to Republican 
economic theology, a rise of prices of but two thirds of 1 per cent. ) 

All of this is based on the economic policies of the 1950's. As I 
note elsewhere, the 1960 platform of the Republican party reflecting 
Nelson Rockefeller's views, and contrary to the silence on growth 
in earlier years, stressed the importance of growth — as did Nixon 
in the campaign. The means of achieving growth for the Republi- 
cans were not primarily through government contributions, but 
through recourse to the incentives of the private enterprise system. 

341 



342 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

As for allocation of national output, the Republicans favor con- 
sumption. Dr. R. J. Saulnier, chairman of President Eisenhower's 
Council of Economic Advisors, recently described his theory of the 
American economy: "Its ultimate purpose is to produce more con- 
sumer goods. This is the goal. This is the object of everything that 
we are working at; to produce things for consumers." No one objects 
to more good things for consumers. Rut most object vigorously to 
the notion that consumer goods are more important than everything 
else and should therefore have first claim on our talents and re- 
sources. Nor does anything that Nixon said or did before the nomi- 
nation suggest he had other views. 1 As Senator Clark of Pennsyl- 
vania has put it: 

The goal of our economy is not the production of more consumer 
goods at all. The goal of our economy is to provide an environment in 
which every American family can have a good house for living and 
shelter, a good school to which to send the children, good transportation 
facilities, and good opportunities for cultural and spiritual advancement 
[to which might have been added a strong and secure national defense]. 

The central issue in the allocation of resources is the question of 
priorities. If the consumer market is allowed to determine our order 
of national priorities, then we will dissipate a good share of our 
talent and resources in self-indulgence and try to build our national 
strength — which includes everything from education to guided 
missiles — out of what is left over. The Russians are not so foolish in 
their conception of priorities. They think that important things have 
first claim on the national energy, and that less important things 
should come after. The statistics are illuminating: in 1955, Russian 
gross national output was 38 per cent of that of the United States; 
but consumption claimed not 38 but 27 per cent of our output; in- 
vestment (building for future growth) 58 per cent of the U.S. level, 
or more than 50 per cent above the 38 per cent of Russian to total 
United States output; defense 84 per cent, or more than twice the 
share of Russian gross national product to United States share. In 
other words, though they produce only 38 per cent as much as we 
do, they devote 84 per cent as much to defense as this country does. 
And each Russian dollar is much more potent than ours. Their tanks 
and planes are excellent, and resources are not wasted on appear- 
ances. Throughout their economy they exclude unnecessary outlays. 



Conclusion: the conflict of parties 343 

Whereas 48 per cent of our output goes to services, only 31 per cent 
of Russian output is so used. 2 

The mechanisms of dictatorship make it easy for the Soviet 
regime to allocate its resources according to a system of priorities. 
Our problem in the United States is to get a more effective allocation 
within our democratic framework. The means are in the hands of 
the Congress: taxation, authorization, and appropriation. What is 
lacking is a sense of national purpose that would automatically 
generate a feeling that some things are more important than others. 
The Republicans, with their apotheosis of the consumer market as 
the be-all and end-all of American life, have in effect renounced the 
possibility of developing national priorities. But the Democrats 
believe that government is the instrumentality of national purpose, 
and that defense, education, health, welfare, social security, even if 
these things can't "pay their way in the market," shall have a 
stronger claim on our national output than piling up more gadgets 
and gimmicks in our basements and attics, and wasting vast re- 
sources through the manufacture of cars that are too long and 
heavy, and — more important, in the midst of this great crisis — than 
introducing a $40 billion interstate road program supported in part 
on a theory of atomic warfare already outmoded. At the same time 
the Eisenhower administration was satisfied with a mere billion- 
dollar four-year educational program as an answer to our deficiencies 
in education as revealed by Sputnik. 

The Republicans, in short, would continue as much as possible 
to let the consumer market order our deployment of resources. This 
would mean longer cars with larger fins, bigger refrigerators, more 
and more gadgets and gimmicks. It would also mean wasted re- 
sources and hence rather falling behind the Soviet Union in ICBM's 
and in the fight for space; it would mean the continued deficiencies 
of American education; it would mean continued failure to make 
adequate provision for resources development, for medical care, 
for housing, for social welfare. The problem confronting the people 
is simple: how do we wish to allocate our national output — should 
we wish to build a nation that can adequately nurture, educate, and 
protect its citizens? Or should we spend to encourage private in- 
dulgence? Each party gives a reasonably clear answer. 

The Republicans, in the end, accept a philosophy of individual 
selfishness, and suppose that in some mysterious way this will assure 
the national welfare. The Democrats fully recognize that individual 



344 }0t THE ECONOMICS OF THE POLITICAL PARTIES 

initiative and creativity constitute our most potent source of eco- 
nomic dynamism. At the same time, they feel that the philosophy 
of "each man for himself and the devil take the hindmost" must be 
tempered by considerations of social and national responsibility, 
not only because there is no other way to provide for the "social 
overhead" of society, from schools to rockets, but also because a 
sense of compassion for others is the most precious part of our moral 
and religious heritage. 

Eisenhower has spoken and at times acted; but as we noted 
elsewhere, a lack of interest in his job, ill health, and Democratic 
opposition often drove a wedge between his ideas and his achieve- 
ments. Eisenhower, in the Whig tradition, refused to take decisive 
positions and through most of his administration allowed Congress 
to act without help or direction from him, allowing or encouraging 
Sherman Adams, George Humphrey and John Foster Dulles to 
usurp Presidential powers. 

President-Elect William Henry Harrison, an aging warrior, an- 
nounced in his inaugural address in 1840 that the task of the Presi- 
dent was to execute the laws presented to him by the Congress — 
never would he seek to impose his will on Congress. The President, 
said Harrison, was not to be the center of power, as Jefferson and 
Jackson had shown he might be. Like Harrison 120 years earlier, 
President Eisenhower and his party would not insist upon action, 
would not cajole Congress. Moreover, as Secretary Bowles so well 
showed in his able book, The Coming Political Breakthrough, Presi- 
dent Eisenhower was afraid to stir things up. He had the Old Guard 
to contend with and then, for what should have been a tertiary 
objective, party unity became his primary aim: not national interest, 
but peace within the party often determined the policies of the 
administration. 3 This determination to achieve unity of party and 
reduce bickering contributed to inaction. 

A good example of inaction is the steel strike of 1959. The 
country, in the midst of the Cold War, experienced one of the most 
serious strikes in all its history. Despite the threat to our security, the 
President waited almost four months before he asked for an in- 
junction. Why did he wait so long? Here are some possible answers; 
the reader may choose among them. 

1. The President's natural disposition was not to act. 

2. Having announced innumerable times the party position, that 
collective bargaining was a matter for labor and management, not 



Conclusion: the conflict of parties 345 

government, he could not easily interfere aggressively despite the 
threat to our economy and security. 

3. A long and costly strike would prolong the prosperity through 
1960 and thus contribute toward a Republican victory in 1960. 
Otherwise the boom might end before the election. (I do not be- 
lieve that a man of Eisenhower's character would consciously act 
from this motive. I am not equally sure of all of his advisors. ) 

Do Eisenhower's creed and policies reflect those of his party? I 
believe they do. Indeed there has been some cross-fertilization. In 
its Task Force Report, the Republican Committee on Program and 
Progress (1959) gave us the latest version of Republican ideology 
and policies. One will find here the same excuses for inaction, the 
same determination to put fiscal "integrity" above all other objec- 
tives, similar well sounding announcements of big aims with little 
follow-up — that we had for eight years. 

In Decisions for a Better America: Economic Opportunity and 
Progress, the emphasis is on the spirit of individual enterprise, eco- 
nomic freedom, the need of taking risks. "It [public policy in the 
area of personal security] should be solidly based on the facts of 
American life, not on a theory that somehow we have become a 
whole nation of economic invalids and must be treated as such. . . ." 

Time and again we are reminded of the sanctity of the dollar, as 
a condition for protecting savings. "Government has a responsibility 
to move effectively against either depression or inflation. . . . This 
approach calls for maximum reliance on monetary and fiscal policies, 
and a minimum emphasis on direct federal spending. . . ." (If 
federal spending is not part of fiscal policy, what is?) 

The modern apostles of growth are held to have no confidence 
"that private enterprise can attain the high growth rates they set 
as goals. . . ." Yet the Republican party reveals that government 
spends $130 billion yearly. Has it been proved that we can attain 
maximum growth without the aid of government? 

Growth apparently depends on the increase of private capital: 
"Per capita real income has increased hand-in-hand with the in- 
crease in private capital investment." But nothing is said of the 
relation of $1,170 billion of government purchases of goods and 
services in the years 1941 to 1958 to the total output of $5.25 trillion. 
These outlays measure not only a contribution to taking goods and 
services off the market, but also protecting our nation against ex- 
ternal aggressors, treating unemployment, straightening out the 



346 ^ THE ECONOMICS OF THE POLITICAL PARTIES 

financial mess of the Great Depression, underwriting billions per 
year for research and education which made possible our remark- 
able growth and so on and so forth. The major emphasis put on 
government by the Republicans is the less the better. 

The four 1959 pamphlets issued by the Republican party make 
it clear that the Republicans are at last beginning to talk in terms 
of growth. By 1975 they anticipate a gross national product of $900 
billion. This "will give us the means to remove the last blight of 
poverty from the land, ... to wipe out slums, rebuild our cities 
... to reduce substantially further the insecurity now caused by 
sickness, indigent old age or unemployment. . . . 

"Despite the growth, we must live within our means, and en- 
courage taxation reforms to spur savings and investment as the way 
to economic progress." Later we are told we must have "strong un- 
employment insurance and social security systems . . . technical 
and financial aid to areas of chronic unemployment . . . training 
and retraining programs . . . reliance on individual consumer and 
business decisions to guide and government economic activity. . . ." 

The party presents eloquent statements of our need of natural 
resources by 1976 and even an argument that the Federal Govern- 
ment may have to increase its contribution to multipurpose river 
development. 

As well might be expected, the latest version of the creed calls 
for "closeness and responsiveness to the individual and groups of 
individuals. . . ." 

It goes on to say: "One consequence of adherence to these prin- 
ciples is to reenforce the wise distribution of power and responsi- 
bility in a Federal-State system. . . . Another is to make possible 
a sympathetic response . . . which does not disregard considera- 
tions of sound fiscal policy. . . ." 

In education, treated in the pamphlet on Human Rights and 
Needs, the Republican party, with its general philosophy given in 
the above paragraph, warns us of a rise of 15 millions in school 
population by 1975 and an enrollment of 12 millions in colleges. 
Total expenditures on education should rise from $20 billion today 
to at least $50 billion by 1976. 

The Commission would provide help for public school buildings 
and academic buildings in higher education — restricted indeed. 
But in view of the need of $50 billion, the part assigned to the 
Federal Government is meager. 



Conclusion: the conflict of parties 347 

This is a quick sketch of creed, objectives and policy. Even here 
the promises are most restrained, the warnings against government 
frequent and vigorous. 

Yet even these promises are hard to justify as honest proposals 
when one puts them against the policies of the Eisenhower years. 
Here is a period during which gross national product rose by $156 
billion in current dollars and almost $100 billion in 1960 prices. 
Federal purchases of goods and services were unchanged at $52-53 
billion in stable dollars. Yet the administration was silent on the 
issue of the relation of rising gross national product and welfare 
expenditures. 

In the view of the Republican "planners," unemployment com- 
pensation must be greatly improved, as well as sickness insurance. 
But the administration fought the- only opportunity to improve the 
former and did virtually nothing on sickness insurance — in fact, 
strenuously opposed permanent disability and hospital insurance 
for the old under Old Age and Survivors Insurance. 

If the space were available, one could take almost every item 
discussed under social security welfare and resources in Decisions 
for a Better America and show that the administration's poli- 
cies from 1952 to 1960 do not check with the promises of 1959. 
In 1956, an election year, the administration yielded a little on 
spending. 

The Republican party in 1959-1960 still sounds like Eisenhower, 
at least in the area of promises. In an earlier chapter, we treat the 
Republican policies of the 1960's as presented primarily by Messrs. 
Nixon, Rockefeller and Goldwater. In 1960, the President expanded 
on earlier views: the Federal Government should not become the 
"master mechanic of our economy — with sweeping authority to 
tinker with the free processes of the competitive enterprise system. 
. . ." The great danger continued to be the national debt and in- 
flation: some "believe that money by the bale can be printed without 
shrinking — a kind of sanforized dollar." Two books on Nixon had 
already revealed his underlying philosophy. Even the more friendly 
one by Mazo quoted Nixon as follows: 

We should make no bones at all about our basic belief that private 
enterprise generally is more efficient and desirable than government 
enterprise. . . . We should also emphasize that opportunity comes ahead 
of security with us. . . . 4 



348 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

In response to Eisenhower's boast that the United States was the 
strongest nation in the world, Stevenson's reply was that the Presi- 
dent was dispensing tranquilizers to the nation. Following the issue 
of the early 1960 economic documents of the Administration, Walter 
Lippmann in his January 22, 1960 column said the President "does 
not distinguish between private prosperity measured in the total 
production of goods and services for private use, and national 
power which is measured not only in terms of armaments but also 
in terms of wealth directed to education, to public health . . ." 

The Battle of the 1960's 

In eight years of Republican management, the emphasis was on 
the contributions of the individual against those of government. 
The campaign of 1960 to some extent reflected this underlying 
philosophy. But under the pressure of Rockefeller and the fear of 
losing New York State, Nixon had a platform written that was not 
always consistent with the Republican past. Indeed, in clear state- 
ments of the Party's ideology, Nixon adhered closely to the theories 
and acts of Republicanism of the 1950's. But not so on the presenta- 
tion of specific programs, where he often seemed prepared to move 
not only beyond Eisenhower, but even beyond Kennedy. Once de- 
feated, however, it was the old Nixon again. The strongest criticisms 
were reserved in 1961 for the inflationists and spenders of other 
people's money. Republicans in Congress, voting against the educa- 
tion bill and the omnibus housing bill and trying to weaken danger- 
ously the foreign aid bill, followed the lead of the ex-President and 
the ex-candidate. 

In the meanwhile, Kennedy tried to follow through on the 
promises made in the Democratic platform. His successes were 
large; but he also encountered some defeats. His major obstacles 
were: 

1. A conservative Congress. The Democrats had an advantage of 
262 against 175 for the Republicans in the House. As Theodore 
White points out, in the first big fight over the Rules Committee, 44 
of the 63 new members voted against the President in February, 
1961; and of 262 Democratic members, 101 were from the Old South, 
of whom more than half usually voted with the Republicans in 
domestic matters. 5 With that kind of Congress, the President had 
to move cautiously and expect defeat on many issues. 



Conclusion: the conflict of parties 349 

2. The difficulties of the dollar abroad were also a source of 
embarrassment. What might be considered excessive recourse to 
monetary creation or deficit financing might further drain our gold 
reserves. 

3. A rise of unemployment to about 7 per cent made the policy 
of full employment more difficult to achieve. 

4. A steady increase in the danger to national security made 
larger outlays for security and space imperative. These contributed 
to rising incomes and declining unemployment. But they also in- 
creased the resistance to the long-term growth policies — for ex- 
ample, education, housing, health. 

One party seeks the help of government to contend with the 
rising power of communism, with the diseases of modern industrial 
and urban life — the insecurity of the sick, the worker, the old, and 
the inadequate resources for education, slum clearance, housing, 
transportation, development of rivers, and so on. The other great 
party is fearful of government and especially of the Washington 
bureaucracy. It would give consumer sovereignty maximum free- 
dom and would be most reluctant to allow further intervention by 
government. Consumers are to determine priorities in the use of 
our limited resources, not government — and despite our continued 
losses to communist countries. 




NOTES 



Abbreviations Used in Notes 

BLS Bureau of Labor Statistics 

B.W. Business Week 

C.R. Congressional Record 

C.Q. Congressional Quarterly 

F.C. I Speeches, Remarks, Press Conferences and Statements of Senator 
Kennedy, compilation of the Subcommittee on Communications of the 
Senate Committee on Interstate and Foreign Commerce 

F.C. II Speeches, Remarks, Press Conferences and Statements of Vice-President 
Richard M. Nixon, compilation of the Subcommittee on Communica- 
tions of the Senate Committee on Interstate and Foreign Commerce 

F.C. Ill The joint appearances of Senator John F. Kennedy and Vice-President 
Richard M. Nixon and other 1960 campaign presentations. 

JEC Joint Economic Committee 

NYHT New York Herald Tribune 

NYT The New York Times 

SRL Saturday Review of Literature 

W.P. Washington Post ir Times-Herald 

Introduction: the major issues 

1. Special Study: Ten Year Projection of Federal Budget Expenditures, 
January 18, 1961. 

2. Staff Report: Federal Fiscal Behavior During the Recession of 1957-58, 
January 13, 1961. 

3. Analyses of Hearings of Senate Finance Committee; Investigation of 
the Financial Condition of the United States, Part 7, pp. 2163-2164. 

4. C.R., August 14, 1961, pp. 14701-14726; August 15, 1961, pp. A6396- 
6400. 

5. NYT, August 11, 1961. 

6. C.Q., June 30, 1961. 

7. Cf . on this issue, President Eisenhower's last Economic Report ( 1961 ) 
and the statement of Kennedy's Council of Economic Advisors, JEC Hearings 
on January, 1961 Economic Report, pp. 321-329. 

351 



352 }£L THE ECONOMICS OF THE POLITICAL PARTIES 

8. Sherman Adams, First-Hand Report ( 1961 ), p. 447. 

9. Research Staff, Republican National Committee, The 1960 Elections, 
April 1961, pp. 16-20 and Table 7. ( Some are my calculations. ) 

10. T. H. White, The Making of the President, 1960 ( 1961 ), p. 60. 

11. Hearings, JEC of January, 1961 Economic Report of the President . . . , 
p. 210. 

12. F.C. II, p. 3. 

13. Hearings, JEC, Review of Annual Report of the Federal Reserve System 
for the Year 1960, 1961, pp. 88-89. 

14. S. Adams, op. cit., pp. 7-8. 

15. Cf., for example, F.C. II, p. 686. 

16. See C.Q., "President Kennedy's Program," 1961, p. 50. 

17. Economic Report of the President, 1961, pp. 186, 188. 

18. F.C. II, p. 198. 

19. Ibid., p. 676. 

20. Cf. the able analysis of H. Rowen, "Kennedy's Economists," Harpers, 
September, 1961. 

Chapter 1: The ideology of the parties 

1. Marquis Childs, Eisenhower: Captive Hero (1958), pp. 20-22. 

2. Woodrow Wilson, The New Freedom (1913), p. 284. 

3. Childs, op. cit., pp. 104-105. 

4. Ibid., pp. 163-167. 

5. R. J. Donovan, Eisenhower, The Inside Story (1956), pp. 57, 59, 172, 
173. 

6. Senate Finance Committee, Financial Condition of the United States 
(1957-1958), p. 558. 

7. Donovan, op. cit., p. 213. 

8. Senate Finance Committee, op. cit., pp. 1129, 1130. 

9. Senate Document No. 123, Republican Report on the 85th Congress 
Together with the Achievements of the Administration, January, 1953, to 
August, 1958, p. 2. 

10. C.R., June 11, 1959, p. 9497. 

11. Arthur Larson, A Republican Looks at His Party ( 1956), p. xi. 

12. Ibid., pp. 198-203. 

13. Ibid., p. 37. 

14. For Stevenson's speeches, see the following volumes: Stevenson's 
Speeches, with a foreword by John Steinbeck (1952); Adlai E. Stevenson, 
What I Think (1955); S. E. Harris, J. B. Martin and A. M. Schlesinger, Jr., 
The New America ( 1957 ) ; also various issues of Democratic Digest. 

Incidentally, I cannot explain Eisenhower's failure to put between covers 
his major speeches while he was in office, especially as contrasted with Governor 
Stevenson's interest in doing this with his own. An explanation may be the 
excessive repetition in Eisenhower's speeches; another the fear that wide publi- 
cation would dramatize promises not kept; a third may be the President's well 
known aversion to reading. At any rate, in writing this book I had to dig into 
the original sources and especially The New York Times, to find the Eisenhower 
speeches. Since what is said at times differs from the advance text released to 



Notes 353 

the press, inaccuracies result. ( Governor Stevenson, at least in the 1956 speeches, 
insisted on using the spoken version. ) 

15. See House Report No. 2578, Availability of Information from Federal 
Agencies . . . 1957-1958, especially pp. 1-5; and C. R. Mollenhoff, "Secrecy in 
Washington," Atlantic Monthly, July, 1959, pp. 14-19. 

Chapter 2: Those in control 

1. I am especially indebted to Miss Marie Henissart, at the time a Harvard 
Law School student, for her help in collecting material for this study. Messrs. 
George Ball and Philip Stern encouraged me to make this study. 

2. We have available the connections of each important member of the 
administration as well as importance of companies they are interested in. 

3. Executive Committee, August 1955: 

John D. Biggers Donald K. David George H. Love 

James B. Black Crawford H. Greenewalt J. P. Spang, Jr. 

Harold Boeschenstein Eugene Holman John C. Virden 

John L. Collyer T. B. Houser Sidney J. Weinberg 

Ralph J. Cordiner Fred Lazarus, Jr. 

4. Hearing before Antitrust Subcommittee of the House Committee on the 
Judiciary, WOC's and Government Advisory Groups, Part II, pp. 156-958, 997- 
998. 

5. Ibid.,p. 1041. 

Chapter 3: Appointments under Kennedy 

1. C.Q., June 30, 1961, p. 1167. 

2. Sherman Adams, First-Hand Report ( 1961 ), pp. 57-61, 77. 

3. At least 38 have written 10 books; The New Yorker, February 4, 1961, 
pp. 109-116. 

4. Based on materials in B.W., June 17, 1961, pp. 107-109. 

5. C.Q., February 28, 1961. 

Chapter 4: The tie-in with big business 

1. Cf. Introduction to The New America, ed. by Harris, Martin and A. M. 
Schlesinger, Jr. (1957). 

2. Economic Report of the President ( 1956), pp. lv, 12. 

3. Report No. 46, p. 59. 

4. Senate Report No. 132, Corporate Mergers and Acquisitions, March, 
1957, esp. pp. 21-26. 

5. The Seventh Annual Report of the Senate, Small Business Committee, 
pp. &-7. 

6. Final Report, House Committee on Small Business, 1959, pp. 49-55. 

7. See W. L. Smith, "Monetary Policy and the Structure of Markets," 
Compendium, Price Policy for Economic Stability and Growth, pp. 505-506. 

8. Investigation of the Preparedness Program: Second Report of the Pre- 
paredness Investigating Subcommittee of the Committee on Armed Services, 
Report on Concentration of Defense Contracts, July, 1950-December, 1954, 
1955, esp. pp. 8, 20, 24-25. 



354 }gt THE ECONOMICS OF THE POLITICAL PARTIES 

9. Senate Report No. 2487, Military Procurement, 1954: Participation of 
Small Business in Military Procurement, 1954, pp. 19-20, 40. 

10. NYT, November 26, 1955. 

11. Ibid., October 27, 1955. 

12. Numerous Democratic National Committee publications have assem- 
bled these facts from hearings and newspapers. See, for example, Democratic 
Fact Sheet, February 21, 1956. 

13. The C.R., Appendix, August 25, 1958, pp. 87, 702, 7001, and July 2, 
1958, pp. 11, 723, etc. 

14. Marquis Childs, Eisenhower: Captive Hero (1958), pp. 275-276. 

15. Committee on the Judiciary, Government Advisory Groups, August 10, 
1955, Serial No. 12, p. 33. 

Chapter 5: The little man and the big interests 



1. Mimeographed version, p. 3. 

2. I have discussed all these issues in my appraisal of the Senate Finance 
Committee Study on the Investigation of the Financial Condition of the United 
States, published by the Senate Committee on August 18, 1959. See esp. pp. 
2134-2139, 2162-2163. 

3. Cf. Federal Reserve Bulletin, July, 1959, p. 715. 

4. The Rockefeller Report on the United States economy, The Challenge 
to America: Its Economic and Social Aspects (1958), p. 66. 

5. Conference on Economic Progress, Inflation, Cause and Cure (1959), 
p. 44. 

6. Survey of Current Business, April, 1959, p. 16. 

7. Cf. Marquis Childs, Eisenhower: Captive Hero (1958), pp. 104-105. 

8. NYT, May 24, 1956. 

9. Associated Press dispatch, March 23, 1954. 

10. NYT, September 18, 1952. 

11. See esp. C.R., April 23, 1959, pp. 5908-5915. 

12. For details of these problems see esp. Senate Report No. 187, Labor- 
Management Reporting and Disclosure Act of April, 1959; Committee Report 
by the Senate Committee on Labor and Public Welfare; Government Regula- 
tion of Internal Union Affairs Affecting the Rights of Members, Selected Read- 
ings, 1958; Hearings, Senate Labor and Public Welfare Committee on Labor- 
Management Reform Legislation, January-March, 1959; C.R., April 23, 1958, 
pp. 5908-5915 and April 28, 1958, pp. 6721, 6723; C.Q., May 1, 1959, p. 585; 
NYT, "Review of the Week," September 6, 1959. 

Chapter 6: The Kennedy creed and that of his opponents 

1. F.C. I. 

2. Ibid., p. 239. 

3. Ibid., p. 374. 

4. Ibid., p. 558. 

5. Ibid., p. 884. 

6. J. M. Burns, John Kennedy, A Political Profile (1960), pp. 266-267. 



Notes 355 

7. J. F. Kennedy, The Strategy of Peace, ed. by A. Nevins (1960), p. XII. 

8. C.Q., January 22, 1960; cf. The Strategy of Peace, p. 209; J. M. Burns, 
op. cit., p. 269; R. E. Neustadt, Presidential Power, The Politics of Leadership 
(1960),esp. Chs. 1,6,8. 

9. F.C. II, pp. 3, 140. The reader will find a good summary of Nixon's 
creed and voting record in that helpful periodical, C.Q., "The Public Record of 
Richard M. Nixon," March 11, 1960. 

10. Ibid., p. 43. 

11. Ibid., p. 50; cf. Arthur Schlesinger, Jr., The Big Decision (1960), pp. 
5-7 where he shows that the objective of Republican leaders was consistently 
maximum consumption. 

12. F.C. II, p. 124. 

13. Ibid., p. 238. 

14. Ibid., pp. 608-609. 

15. Ibid., p. 621. 

16. Ibid., p. 635. 

17. Ibid., pp. 325-328. 

18. Ibid., pp. 888-901. 

19. Barry Goldwater, The Conscience of a Conservative (1960); W.P., 
June 14, 1961, and June 27, 1961, and Congressional Record, 1961, p. 9629 
(defense of Goldwater and attack on writer by Senator Proxmire); also see 
Life, June 9, 1961, and Time, June 9, 1961; Barry Goldwater, "Federal Aid 
to Education," SRL, Spring, 1961. 

20. B. Goldwater, The Conscience of a Conservative, pp. 64-65. 

21. See especially N. A. Rockefeller, A Republican Approach to the Great 
Issues (1960) (a statement of Rockefeller's views, presented just before the 
Republican Convention); and Prospect for America, The Rockefeller Panel 
Reports, 1961 (a compilation of six reports issued in earlier years beginning 
of 1958. The general assumption is that Nelson Rockefeller, who was the lead- 
ing figure in the selection of panel members and in the discussions of the re- 
ports, supported the views presented here. "Although not every member of the 
Overall Panel necessarily endorsed every detail, all approved the substance of 
the reports and urged action on the recommendations." (Ibid., p. xvii. ) 

22. A Republican Approach to the Great Issues, op. cit., p. 14. 

23. Prospect for America, op. cit., pp. 236-245. 

24. A Republican Approach to the Great Issues, op. cit., p. 19. 

25. Prospect for America, op. cit., p. 281. 

26. Ibid., p. 332. 

27. A Republican Approach to the Great Issues, op. cit., p. 8. 

28. Op. cit., pp. 149-152. 

29. Prospect for America, op. cit., especially Reports IV and V and p. 376. 

Chapter 7: Platforms and achievements 

1. See U.S. Budget, 1962, p. 1022, and Economic Report of the President, 
1961, p. 203. 

2. Building a Better America, Republican Platform, 1960. 

3. T. H. White, The Making of the President, 1960 ( 1961 ) , p. 193. 



356 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

Chapter 8: Political aspects of economic policy 

1. Research Staff, Republican National Committee, The 1960 Elections, 
April, 1961, pp. 11-12; T. H. White, The Making of the President, 1960 
(1961), pp. 294, 310, 323, 350-357; Democratic National Committee, Facts 
for Democrats, April, 1961; Summary of Michigan Survey Research Center 
Study of 1960 Election, 1961. 

2. Op. cit., pp. 1, 40. 

3. Hearings, Area Redevelopment, 1961, pp. 3, 4 opp. p. 54. 

4. Republican National Committee, op. cit., p. 10. 

5. Hearings, Area Redevelopment, 1961, p. 543; JEC: (1) Study Paper 
No. 6, The Extent and Nature of Frictional Unemployment; and (2) Study 
Paper No. 23, 1959, The Structure of Unemployment in Areas of Substantial 
Labor Surplus by BLS; 1959. 

6. Republican National Committee, op. cit., p. 20. 

7. Suburban population calculated from Area Development — 1961, pp. 
560-594. 

8. F.C. Ill, p. 228; Republican National Committee, op. cit., p. 11. 

Chapter 10: What causes inflation 

1. The Budget, 1960, pp. M-5 and M-78. 

2. Economic Report of the President, 1959, pp. v-vi. 

3. See especially Analysis of Hearings Before the Committee on Finance, 
U.S. Senate, Part 7, 1959, pp. 2133-2205. 

4. Joint Economic Committee: Staff Report on Employment, Growth and 
Price Levels, 1959, pp. xxvi-xxviii, and Ch. 5. 

Chapter 11: The failure of monetary policy 

1. See the Hearings of the Senate Finance Committee on the Financial 
Condition of the U.S., 1957-1958, pp. 1700, 1702, 1707, 1711. 

2. Cf. a letter of Seymour E. Harris in NYT, May 26, 1956. 

3. See Hearings on the Financial Condition of the U.S., 1957-1958, p. 
1143, for evidence of administration misunderstanding on these matters. 

4. Ibid., pp. C169, C294, C298, C645. 

5. Ibid., and Hearings, Joint Committee Economic Report, Savings Bonds, 
1955-1956, pp. 23 ff. 

6. See Hearings on the Financial Condition of the U.S., pp. 1920-1921, 
discussion between Senator Kerr and Chairman Martin. 

Chapter 12: Money and interest rates: some history 

1. Hearings, Subcommittee on Economic Stabilization, Joint Committee 
on the Economic Report, Conflicting Official Views on Monetary Policy, April, 
1956, p. 43. 

2. Hearings, Senate Banking and Currency Committee, Restoring and 
Maintaining Average Purchasing Power of the Dollar, 1932, pp. 225, 237. Cf. 
Sutton, Harris, Kaysen, and Tobin, The American Business Creed (1956), p. 
239. See my Chapter and Chapter 11 for many similar comments. 



Notes 357 

3. In writing the next few chapters, I have depended to some extent on 
my contributions in the following, as well as other sources: (1) Hearings, Joint 
Committee on the Economic Report, Monetary Policy and the Management of 
the Public Debt, 1952, Statement of Seymour E. Harris, pp. 355-389; (2) 
ibid., Part 2, Replies to Questions, Seymour E. Harris, passim; (3) Hearings 
on United States Monetary Policy, Joint Committee on the Economic Report, 
Recent Thinking and Experience, 1954, pp. 54-60; (4) "The Economics of 
Eisenhower: A Symposium," Review of Economics and Statistics, November, 
1956. 

4. S. E. Harris, The National Debt and the New Economics (1947), pp. 
263-265. 

5. Hearings, Joint Committee on the Economic Report, February, 1956, 
p. 172. 

6. Cf. Hearings, House Committee on Government Operations on the Reuss 
Bill (HR 12785) on Recommendations Concerning Monetary Policies in the 
President's Program, 1959, for a discussion of mistaken policies. 

7. See A. M. Schlesinger, Jr., The Age of Jackson ( 1946), Ch. XL 

Chapter 13: Some issues raised by the independence of the 
Federal Reserve 

1. Cf. my two-volume study, Twenty Years of Federal Reserve Policy 
(1933). 

2. See the excellent statement by Senator Douglas, Member Bank Reserve 
Requirements, Senate Report No. 195, 1959, pp. 16-23. 

3. See Hearings, Financial Condition of the United States, 1957, p. 1258, 
for Martin's views on independence. 

4. Joint Economic Committee, Monetary Policy, 1955-1956, pp. 2 ff. 

5. Senate Report No. 2500, Federal Reserve Policy and Economic Sta- 
bility 1951-57, study prepared by A. Achinstein, 1958, p. 28. 

6. Marquis Childs, Eisenhower: Captive Hero ( 1958), p. 248. 

7. Hearings, Subcommittee on Economic Stabilization of the Joint Com- 
mittee on the Economic Report, Conflicting Official Views on Monetary Policy, 
April 1956, p. 22. 

8. Ibid., p. 6. 

9. Ibid., passim; also see Senate Report No. 2500, Federal Reserve Policy 
and Economic Stability 1951-57, pp. 68-69, where Federal Reserve and its 
open market committee seem in conflict. 

10. Joint Committee on the Economic Report, Monetary Policy and the 
Management of the Public Debt, 1952, pp. 56-57. 

Chapter 14: Kennedy on money and the rate of interest 

1. Democratic Digest, August, 1959, p. 3. 

2. See especially W. Thomas: (1) The Practical Logic of "Bills Prefer- 
ably" (mimeographed), Nov. 23, 1960; (2) The Pattern of Interest Rates and 
Federal Reserve Policy, address of September 13, 1960, at Dartmouth College; 
(3) The Controversy Over Interest Rates, address of January 20, 1960, at New 
York University; W. W. Riefler, Inflation — Enemy of Growth, July 21, 1959, 
Stanford University. 



358 ]& THE ECONOMICS OF THE POLITICAL PARTIES 

3. F.C. II, pp. 867, 927-928, 1086. 

4. F.C. I, p. 560; cf. p. 274. 

5. Prospects and Policies for the 1961 American Economy, A Report to 
President-Elect Kennedy, January 6, 1961 (mimeographed), pp. 3-4, 8-9, 11. 

6. J. Tobin, "The Future of the Fed," Challenge, January, 1961, pp. 24-27. 

7. 1961 Joint Economic Report on the January 1961 Economic Report of 
the President, pp. 13-20. 

8. See The Dollar in Crisis, Introduction and Balance of Payments, 1946- 

1960, S. E. Harris, ed. 

9. Hearings, JEC, Review of Annual Report of the Federal Reserve Sys- 
tem for the Year 1960, 1961, pp. 88-91. 

10. January 1961 Economic Report, 1961, pp. 345-350; Wall Street Journal, 
April 11, 1961. 

11. Ibid., p. 571. 

12. Statistics from Federal Reserve Bulletin, June, 1961. 

13. Monthly Review of Federal Reserve Bank of N.Y., June, 1961, p. 107. 

14. On Housing see especially F.H.A. 26th Annual Report, 1959; Subcom- 
mittee of Senate Banking and Currency Committee, Housing Legislation of 

1961, Appendix, April, 1961; and C.Q., June 9 and June 23, 1961. 

15. F.C. Ill, p. 433. 

Chapter 15: The budget 

1. Herbert Hoover, The Memoirs of Herbert Hoover: The Great Depres- 
sion, 1929-1941 (1952), pp. 30, 97-98; Marriner S. Eccles, Beckoning Frontiers 
( 1951 ), p. 95; R. E. Paul, Taxation in the United States ( 1954), p. 155. 

2. Cf. Democratic National Committee, press release, April 9, 1957. 

3. NYT, June 29, 1959. 

4. Adlai E. Stevenson, The New America (1957), ed. by S. E. Harris, A. 
Schlesinger, Jr., and J. Martin. 

5. Address by J. M. Dodge, Budgetary and Fiscal Problems of Our Gov- 
ernment (mimeographed) (October 12, 1953), pp. 7, 14. 

6. The Budget, 1954, p. M9. 

7. See, for example, Summary of the President's 1953 Budget, prepared 
by the staff of the Joint Committee on Internal Revenue Taxation. 

8. The Budget, 1960, pp. M7-M10. 

9. Senate Finance Committee Hearings on the Financial Condition of the 
United States, pp. 255-257; Budgets, 1953-1957. 

10. Budget of the United States, 1956, p. 489. 

11. Ibid., p. 930. 

12. Cf. C.R., April 25, 1955, pp. 4326-4327. 

13. H. D. Lytton, Estimating Recent Federal Agency Productivity Trends 
(mimeographed) (1959), esp. pp. 8, 30-33 and 45; and "Public Sector Pro- 
ductivity," Review of Economics and Statistics, May, 1961, pp. 182-185. 

14. W.P., March 26, 1954. 

15. The Budget, 1957, p. M78. 

16. Report of the Joint Federal-State Action Committee to the President 
of the United States and to the Chairman of the Governors' Conference, Prog- 
ress Report No. 1, December, 1957, pp. 17-22. 



Notes 359 

17. Hearings, Senate Finance Committee, Financial Condition of the United 
States, 1957-1958, pp. 1129-1130. 

18. Democratic Advisory Council, press release, January 21, 1959; Sherman 
Adams, First-Hand Report ( 1961 ), pp. 171-174. 

Chapter 16: Misleading budgets 

1. Cf. Budget, 1960, p. M53. 

2. G. Colm, The Federal Budget and the National Economy, National 
Planning Association ( 1955), p. 91; cf. pp. 98-99. 

3. W. W. Heller, Federal Debt (mimeographed), National Tax Associa- 
tion, October, 1958. 

4. Democratic Digest, April, 1955. 

Chapter 17: Tax and fiscal policy 

1. Remarks by Treasury Secretary Humphrey Before the Women's Cen- 
tennial Conference, Washington, D.C., April 7, 1954, p. 3. 

2. The Report of the Joint Committee on the Economic Report on the 
January, 1954, Economic Report of the President, House Report No. 1256, pp. 
2-4. 

3. Ibid., pp. 25-26. 

4. Hearings of the JEC. January, 1959, Economic Report of the President, 
1959, p. 400. 

5. Ibid., p. 204. 

6. Ibid., p. 31, for Burns's reluctance to use tax cuts. 

7. See Adlai E. Stevenson, The New America (1957), pp. 91, 92; cf. also 
A. W. Smithies, "The Twin Objectives of Tax Reduction and Reduction of 
the Budget Deficit," National Tax Journal, March, 1955, p. 35; Joint Committee 
on the Economic Report, Federal Tax Changes and Estimated Revenue Losses 
under Present Law, 1952, p. 7. 

8. Joint Committee on the Economic Report, Federal Tax Policy for Eco- 
nomic Growth and Stability, 1955. 

9. Joint Committee on the Economic Report, Federal Tax Policy for 
Economic Growth and Stability, 1956. 

10. Joint Committee on the Economic Report, Federal Tax Policy for Eco- 
nomic Growth and Stability, 1955, pp. 2-5. 

11. Cf. G. Colm, The American Economy in 1960 ( 1952), esp. p. 44; Joint 
Committee on the Economic Report, Federal Tax Policy for Economic Growth 
and Stability, pp. 21-30. 

12. See Democratic National Committee, Fact Sheet, February 25, 1955. 

13. Economic Report of the President, January, 1956; of. House Ways and 
Means Committee, Internal Reverse Code, 1954, p. 1; Senate Finance Com- 
mittee, Internal Revenue Code, 1954, p. 1. 

14. From National Tax Journal, March, 1955, p. 33. 

15. Speech by Secretary Humphrey, Washington, D.C., April 7, 1954; cf. 
D. T. Smith, "Two Years of Republican Tax Policy: An Economic Appraisal," 
National Tax Journal, March, 1955, p. 8. 



360 }0. THE ECONOMICS OF THE POLITICAL PARTIES 

16. Ibid., p. 11; cf. W. W. Heller, "Appraisal of the Administration's Tax 
Policy," National Tax Journal, March, 1955, pp. 19-22. 

17. Joint Committee on the Economic Report, Federal Tax Policy for 
Economic Growth and Stability, p. 133; J. K. Butters, L. E. Thompson, L. L. 
Bollinger, Effects of Taxation on Investments by Individuals ( 1953). 

18. Joint Committee on the Economic Report, Federal Tax Policy for 
Economic Growth and Stability, Report No. 1310, 1956, p. 12. 

19. J. A. Pechman, "Individual Income Tax Provisions of the 1954 Code," 
National Tax Journal, March, 1955, p. 135. 

20. Joint Committee on the Economic Report, Federal Tax Policy for Eco- 
omic Growth and Stability, pp. 260-275. 

21. Heller, "Appraisal of the Administration's Tax Policy," op. cit., p. 16. 

22. Joint Committee on the Economic Report, Federal Tax Policy for Eco- 
nomic Growth and Stability, 1956, pp. 14-16; C.R., March 11, 1955, p. 2271. 

23. NYT, March 16 and 17, 1954. 

24. C.R., March 15, 1954, p. 3038; Economic Outlook, January, 1954. 

25. Quoted by Smith, op. cit., pp. 4-5. 

26. Statistics in this section computed from The 1957 Federal Budget, 
National Income, 1954 ed., Survey of Current Business, July-November, 1956. 

27. Calendar year 1959 corporate profits estimated by Director of the 
Budget: Hearings of the Joint Economic Committee, January 1959 Economic 
Report of the President, 1959, p. 89. 

28. Water Resources and Power, Letter from Chairman, Commission on 
Organization of the Executive Branch of the Government, 1955, p. 36. 

29. The Commission on Intergovernmental Relations, A Report to the 
President, 1955, p. 96. 

30. House Ways and Means Committee, Internal Revenue Code of 1954, 
p. 3. 

31. Ibid., pp. B-l to B-8. 

32. Heller, "Appraisal of the Administration's Tax Policy," op. cit., pp. 22- 
23. 

Chapter 18: Failure of debt management 

1. Seymour E. Harris, National Debt and the New Economics (1947), p. 
267. 

2. Senate Finance Committee Hearings, The Financial Condition of the 
United States, p. 728; cf. the more advanced views of H. Wallich, Assistant to 
the Secretary, The Second Duke American Assembly, the United States Mone- 
tary Policy, March, 1959, pp. 44-46; and J. Baird, Remarks at University of 
Wisconsin, August 18, 1960, pp. 2-5 (mimeographed). 

3. Senate Finance Committee Hearings, The Financial Condition of the 
United States, pp. 1237-1238. 

4. Ibid., pp. 684-685. 

5. lbid.,w. 1164, 1316. 

6. Ibid., pp. 1424-1425. 

7. See, for example, Senate Finance Committee Hearings, Financial Con- 
dition of the United States, Compendium, pp. C271, C330, C335, C384, C410, 
C537, C620, C630, C661. 



Notes 361 

8. Ibid., p. 1849. 

9. See B. Gross and W. Lumer, The Hard Money Crusade (1953), pp. 
42-47, and letter by Seymour E. Harris on the long-term implications of the 
rise in interest rate, NYT, April 5, 1953. 

10. Gross and Lumer, op. cit., p. 49. 

11. Adlai E. Stevenson, The New America ( 1957), p. 93. 

12. Senate Finance Committee Hearings, Financial Condition of the United 
States, pp. 670-676. 

13. Ibid., pp. 163-164. 

14. Ibid., p. 941. 

15. Ibid., pp. 1159-1160. 

16. Debt Management and the Sound Dollar, the Forty-fifth Annual Con- 
vention of Mortgage Bankers Association, Chicago, November 3, 1958. 

17. Senate Finance Committee Hearings, Financial Condition of the United 
States, pp. 682, 945. 

18. C.R., March 17, 1959, p. 3921. 

Chapter 19: The budget and defense 

1. NYT, March 12, 1959; cf. House Document No. 436, U.S. Defense 
Policies in 1957, Library of Congress, January 10, 1958, pp. 82-83. 

2. Democratic Fact Book, 1956, pp. 97-100. 

3. House Appropriations Committee in 1954, p. 42. 

4. NYT, March 21, 1954. 

5. Ibid. 

6. C.R., February 5, 1959, p. 1745. 

7. Excerpts from an address by Thomas K. Finletter at the Yale Alumni 
Association dinner, January 7, 1959 (mimeographed) (Washington, D.C., 
1959), pp. 9-10. 

8. Senate Appropriations Hearings in 1954, p. 59. 

9. House Appropriations Committee, June 17, 1954, p. 7985; cf. Demo- 
cratic National Committee, Fact Sheet, July 14, 1954, and C.R., June 17, 1954, 
p. 7992. 

10. NYT, January 15, 1959; cf. Inquiry into the Satellite and Missile Pro- 
grams, 1958, esp. pp. 10, 68. 

11. House Report No. 2710, 1959, pp. 11-14. 

12. Democratic Digest, April 1955. 

13. NYT, January 24, 1954. 

14. Marquis Childs, Eisenhower: Captive Hero ( 1958), p. 172. 

15. Robert J. Donovan, Eisenhower: The Inside Story ( 1956), p. 239. 

16. National Defense and the 1956 Election, pp. 2-3. 

17. Adlai E. Stevenson, The New America ( 1957), p. xi. 

18. NYHT, January 5, 1955, and Democratic Digest, February, 1956. 

19. W.P., March 26, 1954. 

20. My letter in NYT, May 25, 1953. 

21. G. Colm, Can We Afford Additional Programs for National Security? 
National Planning Association, October, 1953, pp. vii, 21. 

22. W.P., September 20, 1957. 

23. The Problem of National Security, July, 1958, p. 27. 



362 f£ THE ECONOMICS OF THE POLITICAL PARTIES 

24. Joint Economic Committee, Comparisons of the United States and 
Soviet Economies, Part II, 1959, pp. 385, 534. 

25. Sherman Adams, First-Hand Report ( 1961 ), esp. p. 8 and Ch. 19. 

Chapter 20: Kennedy on fiscal policy 

1. F.C. II, p. 124. 

2. Ibid., p. 468. 

3. Ibid., p. 780. 

4. Ibid., p. 834. 

5. Ibid., p. 946. 

6. Speech before Executives Club in Chicago, Chicago Sun-Times, May 
6, 1961. 

7. Congressional Testimonial Dinner, NYT, June 2, 1961. 

8. NYT, January 17, 1961; and Bureau of Budget, Staff Report, January 
13, 1961. 

9. F.C. II, pp. 558-562. 

10. F.C. I, pp. 334, 404, 490; F.C. Ill, p. 543. 

11. B.W., April 15, 1961. 

12. See W.P., June 14, 1961 (letter by S. E. Harris); reply by Senator 
Goldwater, ibid., June 26, 1961; and by Senator Proxmire, C.R., June 14, 1961. 

13. Budget, F.Y. 1962, pp. M-5-M-8; Economic Report of the President, 
1961, pp. 28-31. 

14. January 1961 Economic Outlook . . . Hearings, JEC, pp. 322-333. 

15. Hearings, ibid., pp. 310-372, esp. pp. 369-372. 

16. President's "Message on Budget and Fiscal Policy," March 24, 1961, 
in C.Q.: "President Kennedy's Program," 1961, p. 47. 

17. Hearings, ibid., pp. 509-511. 

18. J. C. Miller, Alexander Hamilton, Portrait in Paradox (1959), esp. Part 
3; and J. M. Blum, from The Morgenthau Diaries, 1959, esp. pp. 419-426. 

19. Address of Secretary Dillon Before National Press Club, June 20, 1961 
(mimeographed), p. 3. 

20. Hearings, ibid., pp. 445-446. 

21. Conference on Economic Progress, Jobs and Growth, 1961, pp. 64-68; 
cf. R. Lekachman, "The Democrats' Conservatism," New Leader, February 
20, 1961, pp. 3-5. 

22. W.P., March 30, 1961. 

23. C.R., June 16, 1961, pp. 1961-1962. 

24. NYT, May 26, 1961; and C.Q., June 2, 1961. 

25. Cf. the excellent paper by G. Colm, American Business Cycle Policy at 
the Crossroads, Lecture at Frankfurt, Germany, July 28, 1961 (mimeographed). 

26. NYT, September 30, 1960, October 2, 1960; B.W., September 24, 1960; 
Survey of Current Business, September, 1960. 

27. C.R., June 8, 1959, pp. 6174-6176. 

28. "Message on Budget and Fiscal Policy" in President Kennedy's Pro- 
grams, op. cit., pp. 47-49. 

29. See C.Q., May 19, 1961, pp. 849-851; and Statement of Secretary Dillon 
Before House Foreign Affairs Committee . . . Act for International Develop- 
ment . . . , June 21, 1961 (mimeographed), pp. 3-5. 



Notes 363 

30. See esp. W. L. Smith, Study Paper No. 19, Debt Management in the 
United States, JEC, January 1960, esp. pp. 10-11. 

31. Ibid., pp. 6, 12. 

32. See C.R., June 8, 1959, pp. 9156-9158; and NYT, August 28, 1961. 

33. President's Tax Message . . . Supporting Exhibits and Documents . . . ; 
by Secretary Douglas Dillon, at Hearings by Committee on Ways and Means, 
May 3, 1961, p. 1. 

34. Ibid., pp. 3-10,.17-40; F.C. Ill, pp. 434-439,. 570-572. 

35. Sherman Adams, First-Hand Report ( 1961 ), pp. 8, 397, 407-408. 

36. Democratic Digest, September, 1960, p. 6. 

37. F.C. II, pp. 6, 27, 534; F.C. Ill, p. 580. 

38. Senator John F. Kennedy, The Strategy of Peace ( 1960), p. 40. 

39. F.C. II, pp. 52, 297. 

40. Special Message on the Defense Budget (reprinted), President Ken- 
nedy's Program, pp. 50-54. 

41. January 1961 Economic Report, Hearings, pp. 618, 676. (The entire 
statement by Assistant Secretary of Defense Hitch is unique and worth careful 
reading. ) 

42. F.C. Ill, p. 582. 

Chapter 21: Republican treatment of recessions 

1. R. J. Donovan, Eisenhower: The Inside Story ( 1956), Ch. XV. 

2. Woodlief Thomas, speech on May 6, 1958 ( mimeographed ) . 

3. JEC, Report, 1958, passim, p. 2. 

4. C.R., January 17, 1957, p. 694. 

5. C.Q., March 21, 1958, p. 359. 

6. C.R., March 13, 1958, p. 3866. 

7. Ibid., pp. 3878-3880, as well as Douglas's long statement before the 
Senate, May 19, 1958. 

8. C.R., May 19, 1958, pp. 836-838. 

9. W.P., May 6, 1958. 

10. U.S. News 6- World Report, April 4, 1958. 

11. CED Anti-Recession Policy for 1959. 

12. C.R., June 11, 1958, p. 9715. 

13. Ibid., July 15, 1958, pp. 12, 559-560. 

14. NYT, June 29, 1959. 

Chapter 22: Growth 

1. For a technical discussion see G. Jaszi, "The Measurement of Aggregate 
Economic Growth," Review of Economics and Statistics, November, 1961. 

For an interesting and able discussion of the problems of growth see K. 
Knorr and W. J. Baumol, eds., What Price Economic Growth, 1961. Here the 
authors consider alternative methods of achieving greater growth; but, anxious 
to avoid excessive government intervention, they limit their discussion largely 
to one possible approach, namely a system of taxes and rebates based on growth 
of individual firms. They are aware of all the difficulties and pitfalls of this 
novel approach. 



364 }0L THE ECONOMICS OF THE POLITICAL PARTIES 

2. See my letter on Mr. Nixon on growth, NYT, June 30, 1960. 

3. At a press conference on June 28, 1961, President Kennedy also be- 
littled Russian rates of growth. But he was more cautious than Nixon. "If both 
countries sustain their present rate of growth, 3^ per cent in the United States 
and 6 per cent in the Soviet Union, Soviet output will not reach two-thirds of 
ours by 1970." C.Q., June 30, 1961, pp. 1183-1184. 

4. Decisions for a Better America, Economic Opportunity and Progress, 
Republican Committee on Program and Progress, 1960, pp. 5-6. 

5. Minority Congressmen of the JEC in the Report on Employment, 
Growth, and Price Levels, 1960. 

6. Cf. my letter, Mr. Kennedy's Statistics, September 19, 1960. 

7. G. Jaszi, op. cit. 

8. Democratic Digest, March, 1959. 

Chapter 23: Kennedy and his opponents on growth 

1. Economic Opportunity and Progress, 1960, op. cit., p. 6. 

2. Address before the Republican National Convention, NYT, July 27, 
1960. 

3. F.C. II, especially pp. 35, 113, 207-208, 238, 670-671, 686-691, 795 
and 918. 

4. Democratic Digest, October, 1960, p. 25; F.C. Ill, p. 79. 

5. F.C. I, pp. 113, 138-139, 152, 269, 274, 284, 293, 463, 467, 499, 526, 
602, 627, 714 and 825-827. 

6. "Economic Recovery and Growth," published in C.Q., "President Ken- 
nedy's Programs," 1961, pp. 6-10. 

7. Economic Report of the President, January, 1961, pp. 48-51. 

8. Hearings, January, 1961, Economic Report of the President . . . JEC, 
March 6, 1961, pp. 310-392. 

9. O. Gass, "Political Economy and the New Administration," Commen- 
tary, 1961, pp. 277-287. 

10. Talk on the U.S. Economy before International Agencies, NYT, Sep- 
tember 29, I960; also cf. Address by Under-Secretary Scribner, August 30, 
1960, Washington, D.C. (mimeographed), in which the speaker assures the 
country of the stability of the economy and supports strongly the severe mone- 
tary policy which shortened the recovery period, F.C. Ill, p. 471. 

11. P. A. Samuelson, "United States Economy at the Turning Point," Lon- 
don Financial Times, July, 1960. 

12. Economic Report of the President, January, 1961, p. 111. 

13. F.C. II, p. 102. 

14. Ibid., p. 834; cf. F.C. Ill, p. 471. 

15. F.C. II, pp. 818-819. 

16. Ibid., p. 927. 

17. F.C. I, especially 113, 124, 287-288, 384, 406-407, 506, 761. 

18. Ibid., p. 280, also F.C. Ill, p. 405. 

19. E. L. Dale, "Humphrey's Theory of Economics," NYT Magazine, March 
17, 1957. 

20. An Analysis of Purposes, Arthur F. Burns' Critique of the Council's 
Position (mimeographed), June 10, 1961. 



Notes 365 

21. A. Hansen, "Appeal for a Dual Economy," NYT Magazine, March 12, 
1961; G. Colm, American Business Cycle Policy at the Crossroads, July, 1961. 

22. F.C. Ill, pp. 216, 474, 542-544. 

Chapter 24: Kennedy on unemployment 

1. January 1961 Economic Report of the President . . . Hearings; JEC, 
pp. 329-330. 

2. Ibid., pp. 470 and 480-483. 

3. "Unemployment Therapy on the New Frontier," W.P., March 19, 1961. 

4. Calculations based on materials in U.S. Department' of Commerce, 
Business Statistics, 1959. 

5. For European experience, see esp. Economic Programs for Labor Sur- 
plus Areas in Selected Countries in Western Europe: Materials Prepared for the 
J.E.C., I960; Studies in Unemployment, Prepared for the Special Committee on 
Unemployment Pursuant to S. Res. 190, 1960, pp. 411-432. 

6. Ibid., pp. 329-330. 

7. Ibid., p. 386. 

8. See U.S. Senate Committee on Unemployment, S, Res. 126, 1960, pp. 
20-22; and Study Paper No. 6, The Extent and Nature of Frictional Unemploy- 
ment, JEC, 1959, pp. 61-67. 

9. B.W., March 25, 1961. 

10. See Time, November 28, 1960; C.R., March 29, 1960, "Area Develop- 
ment, History," etc.; ibid., January 5, 1961, "Sponsoring Area Development 
Bill," B.W., April 18, 1959; "Kennedy Task Force on Area Redevelopment" in 
C.R., January 5, 1961. 

11. National Planning Association, A Joint Statement on the Rise of Chronic 
Unemployment, 1961, pp. 7-8, 11. 

12. See Hearings, January, 1961, Economic Report of the President . . . , 
JEC, p. 30; also S. L. Wolfbein, Hearings before the JEC on Current Economic 
Situation and Short-Run Outlook, December, 1960, pp. 2—66; and Study Paper 
No. 6 for JEC, The Extent and Nature of Frictional Unemployment, 1959, 
p. 62; Study Paper No. 23, ibid., The Structure of Unemployment in Areas of 
Substantial Labor Surplus; also letter by S. E. Harris, "Unemployment Therapy 
on the New Frontier," W.P., March 19, 1961; and Senate Banking and Currency 
Hearings, Area Development — 1961, 1961. 

13. C.Q., June 2, 1961, p. 7; also see F.C. Ill, pp. 338-339 for a compre- 
hensive treatment suggested by Kennedy in the campaign. 

14. Ibid., p. 989. 

Chapter 25: Welfare programs 

1. See, for example, Senate Hearings, President's Message Disapproving 
Senate 57, July, 1959, pp. 474-475, 485. 

2. The President's Committee on Education Beyond the High School, 
Second Report to the President, July, 1957, p. 89. 

3. R. J. Donovan, Eisenhower: The Inside Story ( 1956), p. 172. 

4. Adlai E. Stevenson, What I Think ( 1956), p. 50. 

5. Ibid., pp. 127-130. 



366 ^0 THE ECONOMICS OF THE POLITICAL PARTIES 

6. Adlai Stevenson, The New America ( 1957), esp. Part III. 

7. Ibid., pp. 86-87. 

8. Ibid., pp. 94-95. 

9. Ibid., p. 103. 

10. See NYT, August 10, 1959. 

Chapter 26: The old 

1. See the 12th Annual Congressional Quarterly Almanac, 1956, pp. 178- 
179. 

2. Ibid., p. 397; cf. 14th Annual Congressional Quarterly Almanac, 1958, 
p. 457. 

3. 12th Annual Congressional Quarterly Almanac, 1956, p. 159. 

4. Budget, 1960, pp. M69-M70. 

5. Ibid., p. M70. 

6. Social Security Bulletin, January, 1959, pp. 18-19. 

7. See H.R. 4700, A Bill to Provide Insurance Against the Costs of Hos- 
pital, Nursing Home and Surgical Service for Persons Eligible for Old Age and 
Survivors' Insurance Benefits and for Other Purposes, February 18, 1959; also 
statements by Nelson H. Cruikshank; Report of the House Ways and Means 
Committee, July 14, 1959; also statement by Congressman Forand on February 
18, 1959; and statement by Seymour E. Harris on July 14, 1959; and also 1960 
Hearings. 

8. Adlai E. Stevenson, The New America ( 1957), pp. 141-157 

9. Cf . ( 1 ) An Analysis of the Social Security Program, Appendix I, Statis- 
tical Table, 1954, pp. 1107, 1139; Social Security after 18 Years, a staff report 
to the Ways and Means Committee, 1954, p. 16; Social Security Bulletin, 
September, 1954, pp. 65-77, and "Old Age and Survivors' Disability Insurance 
Provisions: Summary of Legislation 1935-58," Social Security Bulletin, 1959, 
pp. 15-20. 

10. Cf. Analysis of the Social Security System, Appendix I, pp. 1099, 1172, 
and Social Security Bulletin, October, 1958, p. 7. 

11. For proposed improvements, see A. J. Altmeyer, "New Goals for Social 
Security," paper presented at the fifty-eighth annual meeting, National Con- 
sumers' League, Washington, D.C., December 5, 1958. Also see the statement 
by Nelson H. Cruikshank, "Social Security and Pensions for Older Workers," 
paper for the Sub-Committee on Problems of the Aged and Aging of the Senate 
Committee on Labor and Public Welfare, June 11, 1959. 

12. See S. E. Harris, The Incidence of Inflation, Study Paper for JEC, 
1959, Chs. 5-7. 

Chapter 27: Federal aid for education 

1. National Citizens Commission for Public Schools, How Do We Pay for 
Our Schools? (1954), p. 24; House Committee on Education and Labor, 
Federal Aid to School Construction (Legislative Reference Service Report), 
1954, pp. 85-86; cf. Hearing, Committee on Labor and Public Welfare, United 
States Senate, Emergency Federal Aid for School Construction, 1955, p. 67. 

2. Financing Public Education in the Decade Ahead, 1954, p. 57; Council 
of State Governments, The Forty-Eight States School Systems (1949), p. 70. 






Notes 367 

3. See National Education Association, Educational Differences Among the 
States (1954), for variations in needs, income and so on; S. E. Harris, More 
Resources for Education ( 1960 ) . 

4. The Committee for the White House Conference, A Report to the 
President, 1956, esp. pp. 56-61. 

5. Hearings, Committee on Labor and Public Welfare, United States 
Senate, Construction of School Facilities, 1954, p. 139. 

6. Hearings, Committee on Labor and Public Welfare, United States 
Senate, Federal Aid for Education, 1947, pp. 39-43. 

7. Statement before the Senate Committee on Labor and Publtc Welfare, 
February 16, 1955. 

8. Senate Hearings, Construction of School Facilities, 1954, pp. 11-12. 

9. Eisenhower, School Program Message, January 12, 1956. 

10. NYT, October 3, 1956. 

11. Marquis Childs, Eisenhower: Captive Hero ( 1958), pp. 247, 248. 

12. Cf. Higher Education in the United States: The Economic Problems, 
S. E. Harris, ed. (1960); American Assembly, The Federal Government and 
Higher Education, 1960; Financing Higher Education, 1960-1970, D. Keezer, 
ed.: S. E. Harris, "Higher Education: Resources and Dollars," 1902. 

13. The Commission on Intergovernmental Relations, A Report to the 
President for Transmittal to the Congress, 1955, p. 196. 

Chapter 28: Medicine 

1. Commission on Organization of the Executive Branch of the Govern- 
ment, Task Force on Federal Medical Services, 1955, p. vii. 

2. See Supplement of Survey of Current Business, National Income, 1954 
ed.; Social Security Bulletin, December, 1958, p. 9; the President's Economic 
Report, January, 1959. 

3. C.R., May 27, 1958, p. 1957; Social Security Bulletin, October, 1958, 
p. 23; President's Budget, 1960, pp. M64 and M72; Commission on the Organ- 
ization of the Executive Branch of the Government, Task Force on Federal 
Medical Services, 1955, p. 2; cf. O. R. Ewing, Report to the President on the 
Nations Health, 1948, pp. 28-30, and Financing a Health Program for America, 
1953. Vol. IV. 

4. The Nation's Health, pp. 1, 27. 

5. Cf. Preliminary Report of the House Committee on Interstate and 
Foreign Commerce, on Health Inquiry, 1954, p. 1. 

6. C.R., January 28, 1958, p. 993. 

7. National Income and Expenditures of the United Kingdom, 1946 to 
1949, Cmd. 7932, p. 32. 

8. Cf. C.R., January 14, 1955, for earlier efforts by liberal Republicans. 

9. Social Security Bulletin, 1958, p. 9. 

10. See the following for details on medical school needs: The Surgeon- 
General's Committee on Medical School Grants and Finances, Conclusions and 
Recommendations, Part I, 1950, pp. 39-43, and Part II, Financial Status and 
Needs of Medical Schools, p. 80. 

11. Financing Hospital Care in the United States, Vol. I, Recommendations 
of the Commission, 1954, pp. 36-37. 



368 )0L THE ECONOMICS OF THE POLITICAL PARTIES 

12. See esp. Task Force Report on Federal Medical Services, Ch. VI for 
later developments. 

13. Budget, 1960, p. M64; cf. C.R., June 20, 1958, pp. 10731-10733, and 
Task Force Report on Federal Medical Services, pp. 52-59, and U.S. Depart- 
ment of Health, Education and Welfare, How Many General Hospital Beds 
Are Needed? 1953, pp. 62-63. 

14. Recommendations of the Commission on Financing Hospital Care, pp. 
11,20. 

15. NYT, January 28, 1955; and C.R., March 5, 1956, pp. 3472-3473. 

16. See esp. the Congressional Quarterly Almanac, 1955, pp. 259-261; C.R., 
May 3, 25 and 30, 1955;- and an article in Harpers, "Salk Vaccine: What 
Caused the Mess?" ( 1955). 

17. Congressional Quarterly Almanac, 1955, pp. 71, 72, 440-441. 

Chapter 29: Unemployment and disability insurance 

1. Hearings, Senate Finance Committee on Financing Unemployment 
Compensation, May, 1958, pp. 88; cf. ibid., p. 93. 

2. U.S. Department of Labor, Bureau of Employment Security, Supple- 
ment to Handbook of Unemployment Insurance Financial Data, 1957, p. 3. 

3. Ibid.; also see HEW: Health, Education and Welfare Indicators, May, 
1961, p. 38; and the Economic Report of the President, January, 1961, p. 156. 

4. Senate Hearings, op. cit., p. 120. 

5. Congressional Quarterly Almanac, 1958, pp. 378-379, 434-435. 

6. ( For cost of the Eisenhower program, see Hearings, Senate Committee 
on Finance, Temporary Unemployment Compensation, March, 1959, p. 11; and 
Budget, 1960, p. M64. 

7. Figures from National Income, 1954 ed., Social Security Bulletin, 
September, 1954, and Economic Report of the President, January, 1954. 

8. R. A. Lester, "Issues in Unemployment Insurance," paper for the 
Social Security Conference, East Lansing, November 18, 1958 (mimeographed), 
p. 7. 

9. Handbook of Unemployment Insurance Financial Data, p. 2; S. E. 
Harris, Study Paper No. 7, "The Incidence of Inflation or Who Gets Hurt," for 
Joint Economic Committee, 1959, esp. pp. 56-66. 

10. 1957 Supplement, Handbook of Unemployment Insurance Financial 
Data, p. 5; see also Senate Hearings on Unemployment Compensation, 1958, 
pp. 50-51; cf. Hearings, Senate Committee on Finance, Unemployment Com- 
pensation, 1952, p. 18. 

11. Department of Labor, State of New York, Annual Report of the State 
Advisory Council on Employment and Unemployment Insurance, 1954, p. 35. 

12. Cf. Social Security Bulletin, September, 1954 (Annual Statistical Sup- 
plement). 

13. Social Security Bulletin, September, 1954, p. 8, and October, 1958, p. 
23; cf. January, 1959, pp. 8-14; cf. FSA, Social Security Legislation Through- 
out the World, 1949, p. 2; Arthur Larson, Next Steps in Wage Substitution, 
address in New York City, December 28, 1954 (mimeographed), p. 9; cf. 
Department of Health and Welfare, Social Security Expenditures in Australia, 
Canada, Great Britain, and the United States, 1949-50 (Ottawa, 1954), and 
America's Health Status, Vol. Ill, pp. 107-108. 



Notes 369 

Chapter 30: Housing and urban redevelopment 

1. See Charles Abrams, "United States Housing," New Leader, January 
13, 1958. 

2. C.Q., February 3, 1956, p. 127. 

3. C.R., June 22, 1949, p. 8303. 

4. See also C.R., 1957, pp. 7225-7231; C.Q., July 27, 1956, pp. 911, 912; 
Budget, 1962, pp. M47, M48; and C.Q., "President Kennedy's Programs," 
1961, p. 48. 

5. Budget, 1960, pp. M52, M53. 

6. See, for example, Hearings, Senate Committee on Banking and Cur- 
rency, the Housing Act of 1959, pp. 92-97. 

7. Senate Hearings, The Housing Act of 1959, p. 86. 

8. See Senate Document No. 34, The Housing Act of 1959, Veto Message, 
pp. 1-3; see also Senate Report No. 41, Report of the Committee on Banking 
and Currency, Housing Act of 1959, February, 1959, and Statement of Senator 
Sparkman Announcing Hearings upon the President's Message Vetoing the 
Housing Bill, S. 57, and the Recommendations of the President, July 15, 1959; 
see also the accompanying hearings. 

Chapter 31: Depressed areas 

1. C.R., May 3, 1958, p. 7432; see also four statements made by the author, 
three before Congressional committees: (1) The Existence of Chronically De- 
pressed Areas During Periods of Full Employment, with Special Focus on Inter- 
regional Problems Arising from Current Trends of Industrial Migration, State- 
ment before the Joint Committee on the Economic Report, Sub-Committee on 
Low-Income Families, November 15, 1955; (2) Statement on S. 2663, A Bill 
to Establish an Effective Program to Alleviate Conditions of Excessive Unem- 
ployment in Certain Economically Depressed Areas, before the Senate Com- 
mittee on Labor and Public Welfare, February 3, 1956; (3) Statement on the 
Area Redevelopment Act (S. 964), before the Banking and Currency Committee, 
April 9, 1957; (4) The Area Redevelopment Bill: The Case for a Federal Pro- 
gram, before the New England Council, Hartford, March, 1959 (mimeo- 
graphed). See also the full hearings on these three Committee Hearings, and 
C.R., May 12, 1958, pp. 7503-7510, and Hearings, Senate Banking and Cur- 
rency Committee, Area Development — 1 961. 

Chapter 32: Kennedy on welfare 

1. This is not exactly accurate unless the Truman administration gets 
credit for units completed in 1953 and 1954. From 1955 to 1960 the average 
was only 15,000 as compared with almost 60,000 from 1952 through 1954. 
Senate Banking and Currency Committee: Housing Legislation of 1961, Ap- 
pendix; Review of Federal Housing Programs, 1961, p. 66. 

2. F.C. I, pp. 552, 676, 684. 

3. 26th Annual Report of Federal Housing Administration, 1959, p. 64. 

4. F.C. II, pp. 326-327. 

5. F.C. II, p. 630; and Senate Banking and Currency Committee, Hous- 
ing Legislation of 1961, Appendix; Review of Federal Housing Programs, 1961, 
p. 90. 



370 }gl THE ECONOMICS OF THE POLITICAL PARTIES 

6. F.C. I, pp. 503-504, 674-675. 

7. F.C. II, pp. 279-286. 

8. Budget, 1962, p. M71. 

9. Cf. F.C. I, pp. 19, 22, 40-41; and F.C, II, pp. 477, 885. 

10. NYT, March 25, 1961; C.Q., "President Kennedy's Programs, 1961, 
p. 47; and JEC, January, 1951, Economic Report of the President, April 1961, 
p. 509. 

11. NYT, February 3, 1961; and President Kennedy's Programs, op. cit., 
pp. 9, 10. 

12. President Kennedy's Programs, op. cit., p. 6. 

13. F.C. II, p. 780. 

14. JEC Hearings January 1961 Report of the President, pp. 504-506. 

15. President Kennedy's Programs, op. cit., pp. 31-33; C.Q., June 9, 1961, 
p. 938; and The Budget, 1962, p. M-12. For discussions of the 1961 legislation 
and the housing problems and developments under earlier legislation and es- 
pecially the failures to provide assistance where most needed, see Senate Bank- 
ing and Currency Committee, Housing Legislation of 1961, Appendix; Review 
of Federal Housing Programs and Hearings on Housing Legislation of 1961, 
esp. Evidence of Robert C. Weaver, pp. 245 et seq. 

16. C.Q., March 17, 1961, p. 419, and March 24, 1961, pp. 483-484. 

17. C.Q., February 24, 1961, p. 307; March 31, 1961, p. 509; July 21, 1961, 
Congressional Boxscore. 

18. See especially the Kennedy Message on National Resource Policy in 
President Kennedy's Programs, op. cit., pp. 22-25; and Senate Report No. 29, 
Report of the Select Committee on National Water Resources Pursuant to S. 
Res. 48, 1961, esp. pp. v-vi and 15-19. 

19. For material in the last two sections, see the Task Force reports on 
Area Development, Education, Resources, Housing and Health and Social Se- 
curity. These are available in full or summary form in NYT and C.Q. The Pres- 
ident's messages to Congress are to be found in NYT and also in President 
Kennedy's Programs—see esp. pp. 6-10, 15-17, 19-20, 22-25, 31-33. Also 
helpful are the Congressional hearings on these problems — e.g., Ways and 
Means, Hearings on Temporary Unemployment Compensation, 1961, esp. pp. 
12-17, 370-397, and Senate Banking and Currency Committee Hearings on 
Area Development — 1961, and Housing Legislation of 1961; Senate Report No. 
255 on School Assistance Act of 1961, and Report No. 652 on National Defense 
Education Act Amendment of 1961. Also see Democratic Advisory Council, 
The Democratic Program for Social Security, Sept. 20, 1960 (mimeographed); 
ibid., Education and Freedoms Future, The Democratic Approach to America's 
Natural Resources, The State of Our Cities and Suburbs in a Changing Amer- 
ica, various issues of the Democratic Digest, Research and Education Com- 
mittee for a Free World, The Facts about Salt Water Conversion, 1960; Senator 
Lyndon Johnson, Expansion and Extension of Saline Water Conversion, C.R., 
May 16, 1960; Senator James Murray, "Meeting Our Nation's Resource Needs," 
C.R., August 17, 1959. 

Chapter 33: Natural resources 

1. C.R., August 30, 1955, p. A5843. 

2. Hearing before the special subcommittee of the Committee on Govern- 
ment Operations, House of Representatives, October 31, 1955, pp. 716, 717. 



Notes 371 

3. Press release, Statement of Senator Kefauver for August 11, 1956. A 
defense of administration bungling on this issue is to be found in Sherman 
Adams, First-Hand Report (1961), pp. 310-317. Adams admits that the Budget 
Director had failed to inform the President of Wenzell's relations with the 
First Boston Corporation and the Dixon-Yates contract. 

4. NYT, July 20, 1956; C.Q., July 20, 1956, p. 873. 

5. Krutilla and Eckstein, Multiple Purpose River Development (1958), 
esp. Ch. V. 

6. Special report of Senate Committee on Interior and Insular Affairs, on 
Hearings scheduled for September 19, 1955, Subject of Hell's Canyon Power 
Preference Clause and Power Partnership. 

7.' R. J. Donovan, Eisenhower: The Inside Story (1956), pp. 140, 319, 
320. 

8. See Richard and Maurine Neuberger, Washington Calling ( 1957 ) ; 
R. Neuberger, "Partners in Plunder," Progressive Magazine, July, 1955; NYT, 
July 27, 1956. 

9. Cf. NYT, January 19, 1956. 

10. P. 14; cf. also C.Q., January 13, 1956, pp. 55-56. 

11. C.R., March 12, 1956, pp. 36-47. 

12. Adlai E. Stevenson, What I Think (1955), pp. 135-136; see also H. 
Humphrey, "The Struggle for Atomic Power," The Progressive, October, 1954. 

13. C.Q., December 21, 1956, pp. 1452-1454. 

14. Adlai E. Stevenson, The New America ( 1957), pp. 159, 175-176. 

15. Advisory Council of the National Democratic Committee, Democratic 
Programs for Action, No. 2, The Democratic Approach to America's Natural 
Resources, 1959. 

Chapter 34: Agricultural policy 

1. Statistics from the President's Economic Report, January, 1959, and 
Commodity Credit Corporation, Charts Providing a Graphic Summary of Op- 
erations, 1933 through June 30, 1958. 

2. The Budget, 1960, p. 158; ibid., 1962, p. 1022. 

3. House Document No. 149, Message from the President of the United 
States Relative to the Development of Agriculture's Human Resources — A 
Report on Problems of Low Income Farmers; see also the Third Annual Report 
of the Secretary of Agriculture on Our Rural Development Program, September, 
1958, and the Proceedings of Conference on Rural Development Programs, 
Memphis, June, 1958. 

4. A Solid Future for Agriculture, Address at White Sulphur Springs, West 
Virginia, June 16, 1953 (mimeographed). 

5. Also see CED, Towards a Realistic Farm Program, December, 1957. 

Chapter 35: Kennedys farm policies 

1. See F.C. I, especially pp. 35, 320-324, 415. 

2. Ibid., pp. 428, 739, 742. 

3. F.C. I, pp. 320-324; Message on Feed Grains of February 16, and 
Farm Program of March 3, 1961, in C.Q., "President Kennedy's Programs, pp. 
20-21, 38-41, 67; and F.C. II, pp. 148-150, 250-254; C.Q., January 27, 1961, 
p. 115. 



372 ^0 THE ECONOMICS OF THE POLITICAL PARTIES 

4. Building a Better America, Republican Platform, 1960, p. 12. 

5. 1960 Democratic Platform, in C.Q., July 15, 1961, p. 1241. 

6. President Kennedy's Programs, op. cit., p. 38. 

7. Ibid., p. 39. 

8. NYT, July 26, 1961. 

9. Cf. F.C. I, p. 472; F.C. II, pp. 418, 428. 

10. March 24 Budget in President Kennedy's Programs, op. cit., p. 48. 

Chapter 36: International economics 

1. See C.Q., May 16, 1958, p. 600. 

2. Ibid., June 30, 1955, p. 653. 

3. See the President's Address to the National Conference on International 
Trade Policy, reprinted in C.R., March 31, 1958, pp. 5103-5105, for fallacious 
arguments. 

4. See C.Q., July 24, 1959, p. 1014; Adlai E. Stevenson, The New America 
(1957), p. 23, and also the excellent address by Representative Chester 
Bowles, "A Fresh Look at Foreign Aid," which was inserted into C.R., March 
11, 1959. 

5. See the President's Budget, 1960, p. 1013; cf. Preliminary Report and 
Letter of Transmittal of the President's Committee to Study the United States 
Military Assistance Program, 1959, p. 4; and JEC: Staff Report on Employ- 
ment, Growth, and Price Levels, 1959, p. 445. 

Chapter 37: Kennedy on international economics 

1. F.C. I, pp. 560-561. 

2. F.C. II, pp. 734-735. 

3. F.C. I, pp. 823-827. 

4. See The Dollar in Crisis, S. E. Harris, ed. (1961), especially Introduc- 
tion and essays by Bernstein, Cooper, Haberler and Harrod; U.S. Dept. of 
Commerce, United States Business Investments in Foreign Countries, 1960; 
GATT, International Trade, 1969, pp. 6-9, 59-63; U.S. Dept. of Commerce, 
Comparative Statistics of Exports of Manufactures from the United States, 
Western Europe and Japan, 1954-1958 and 1959; and also Analysis of Changes 
in United States' Share of Export Markets, 1954-1958, 1959. 

5. Economic Report of the President, 1961, pp. 37-40; CED, The Com- 
mon European Market and Its Meaning to the United States, 1959, esp. pp. 
11-17. 

6. Republished in The Dollar in Crisis; also see JEC Hearings, Interna- 
tional Payments Imbalances, 1961. 

7. See President's Tax Message Along with Principal Statements . . . 
Submitted by Secretary Douglas Dillon at Ways and Means Committee, 1961, 
pp. 6-7, 23-26, 51-60; B.W., February 11, 1961-April 22, 1961. 

8. J. F. Kennedy, The Strategy of Peace ( 1960 ) , pp. 143-158. 

9. F.C. I, p. 232; also see pp. 154, 183, 297, 349, 353, 569-570. 

10. F.C. II, pp. 30-31. 

11. The Budget, 1962, p. 102. 

12. C.Q., "President Kennedy's Programs," pp. 35-37, 42-45; and C.Q., 
June 2, 1961, pp. 907-908. 



Notes 373 

13. Senate Foreign Relations Committee Hearing on Act for International 
Development, 1961, pp. 95-96, 105. 

14. Sherman Adams, First-Hand Report (1961), p. 458; also see Ch. 18; 
and S. E. Harris, International and Interregional Economics (1957), pp. 358- 
364. 

15. F.C. I, pp. 67, 80. 

16. New England Textiles, Report to the Conference of New England 
Governors, June 21, 1961, by S. E. Harris, pp. 1-4 to 1-6, 11-45, 11-46. 

17. NYT, July 24, 25. 

Chapter 38: Conclusion: the conflict of parties 

1. Cf. A. M. Schlesinger, Jr.: Kennedy or Nixon: Does It Make Any Differ- 
ence? (1961), pp. 39-40. 

2. Statistics from Joint Committee on Economics, Comparisons of the 
United States and Soviet Economies, Part II, 1959, pp. 383, 534. 

3. Herbert Agar, The Unquiet Years (1957), pp. 140-153; Chester 
Bowles, The Coming Political Breakthrough ( 1959), pp. 187-192. 

4. Earl Mazo, Richard Nixon: A Political and Personal Portrait ( 1959 ) , p. 
269; and William Costello, The Facts About Nixon ( 1960). 

5. T. H. White, The Making of the President ( 1961 ), p. 361. 



SUBJECT INDEX 



Academicians, 28 

Agricultural Marketing Agreement Act, 

320 
Agriculture, 12, 15, 64, 67, 134, 314- 

322 
Air Force, 172 
Al Sarena case, 309 
American Medical Association, 191, 

252, 266, 270, 272, 293 
Antitrust policy, 7, 36, 42 
Area development program, 6, 188, 

192, 241, 286, 294 
Area Redevelopment Bill, 288 
Army Times, 114 
Atomic Energy Commission, 39 
Atomic power, 311 
Authority, division of, 52 
Automatic stabilizers, 184, 210-211 
Automation, 226-227, 253, 289 

Back-door financing, 66, 192, 295-296, 

334 
Balance of payments, 121, 194, 229, 

330^333 
Balanced budget, 7-11, 130, 140, 145, 

147, 149, 178,180, 182,211 
Berlin crisis, xxx, xxxii, 186 
Bills-only policy, 110, 113, 119-120, 

123 
Brannan plan, 317 
Budget, xxxiv, 129-144, 189, 249; and 

defense, 169-177 
Budget Bureau, 170, 183 
Bureau of Internal Revenue, 135 
Business Advisory Council, 21, 28, 31 
Business Week, 181 

Campaign expenditures and receipts, 

33-34 
Capital gains, 195 
Capital movements, 119, 123 
Catholic vote, 73, 76-78, 81 
Central Intelligence Agency, 172 
Centralization, 6 
Chrysler Corporation, 37 
Civil Service Retirement Fund, 134- 

135, 144, 252 
Classroom shortage, 256 



Colorado River project, 55, 307-308 
Columbia River Authority, 21 
Commercial banks, 84, 95, 98 
Commission for Financing Hospital 

Care, 267-268 
Committee on Astronautics and Space 

Exploration, 172 
Committee for Economic Develop- 
ment, 137, 176, 207-208 
Commodity Credit Corporation, 315 
Common Market, 331-332, 337 
Consumer prices, 85, 88 
Consumption, 156, 195-196, 342 
Corporate mergers, 36, 41-42 
Corporation income tax, 37, 154 
Corruption, 38-41 
Coulee Dam, 13 

Council of Economic Advisers, 31, 
108, 119, 181, 183-185, 224, 227, 
230-231 
Countervailing power, 19 

Debt, 138, 186 

Debt management, 11, 84, 158-168, 

192-194 
Defense, 10, 133, 169-177, 179, 198, 

215 
Defense, Department of, 38, 174 
Deficit financing, 65, 115, 148, 178- 

179 
Demand ? 74, 91, 221, 254 
Democratic Advisory Council, 139 
Democratic Digest, 114, 196-197, 206 
Democratic National Committee, 156, 

312 
Democratic Party, financial and voting 

strength, xxiv; monetary policy, 103- 

104; objectives, xxiii, xxxiii-xxxiv 
Depletion allowance, 54, 69, 153, 195- 

196 
Depreciation allowance, 156, 194 
Depressed areas, 226, 232-233, 241, 

286-290 
Disability insurance, 251, 278-279 
Distribution of income, 7, 46-47, 63, 

221 
Dividends, 156 
Dixon-Yates affair, 18, 39, 304-305 

375 



376 



}0i SUBJECT INDEX 



Doctor shortage, 267 

Dollar problem, 123, 183, 330-333, 

335, 349 
Douglas Area Development Bill, 226, 

289 
Draper Committee, 326-327 

Economic growth, 30, 43-45, 54, 58, 
62-63, 91, 116, 131, 150, 212-228, 
293, 341, 345; determinants of, 215- 
216; and money supply, 102-105 

Education, 31, 55, 56, 64, 67, 134, 
192, 217-218, 241, 243, 248-250, 
256-263, 292, 343, 346; and voting 
behavior, 79 

Eisenhower administration, tie-in with 
big business, 33-42; defense policy, 
169-177; economic philosophy, 3 ff.; 
economic policies, 9ff.; inflation un- 
der, 88; objectives in debt manage- 
ment, 158 

Electrical industry, 7 

Emergency Unemployment Compen- 
sation Act, 190 

Employment Act of 1946, 107-109, 
112 

Entrepreneurship, 154 

Excise taxes, 146, 152-154, 156 

Export-Import Bank, 191 

Fair Deal, 239 

Fairless Committee, 326-327 

Farm prices, 8 

Federal expenditures, 57-58, 139, 
183-184 

Federal Housing Administration, 191 

Federal National Mortgage Associa- 
tion, xvii, 141-142, 189-190, 241, 
249 

Federal Reserve, xix, 65, 68, 78, 114- 
125, 162, 207, 216; Accord of, 1951, 
162; and debt management, 158— 
168; independence of, 106-113, 
125; policy, 92-99; weapons of, 83- 
84 

Federal Reserve Act, 125 

Federal Security Administration, 265 

Federal Trade Commission, 7, 36 

Financial intermediaries, 84, 95-98, 
117 

First Boston Corporation, 39, 305 

Fiscal policy, xv, 11, 30, 67-68, 96, 
116, 129-199; obstacles to, xvi-xvii; 
Republican view on, xv 



Forand Bill, 252-253 

Foreign aid, 15, 30, 32, 66, 327, 332- 

335 
Foreign policy, 10 
Formosa crisis, 18 

Gaither Report, 175, 198 

Gallup poll, 78 

General Motors Corporation, 37 

Geneva Protocol, 328 

German revaluation, 333 

Gold standard, 8 

Goldfine case, 40 

Gore-Holifield Bill, 311 

Government bond market, 159, 162, 

167-168 
Government contracts, 38, 41-42, 289 
Government deficits, 30, 86, 89, 90, 

99, 145, 181-183, 199, 204, 207, 

210-211 
Government role in national life, xv 
Great Depression, 7, 88, 101, 129, 214, 

239, 245 
Greenbackers, 104 
Gross National Product, xxx-xxxi, 45, 

57-58, 87, 123-124, 187, 209, 243, 

303-304; per capita, 215 

Health, 218 

Health, Education and Welfare, De- 
partment of, 12 
Health insurance, 242, 248, 252-253, 

266, 269-270, 293 
Hell's Canyon project, 55, 306-308 
Hercules Powder Company, 311 
Hoover Commission, 155, 271 
House Rules Committee, 68, 297, 348 
House Ways and Means Committee, 

66, 68, 156 
Housing, 32, 47, 64, 134, 142, 241, 

281-285, 291, 295, 298-299 
Housing Act of 1949, 55; of 1959, 

142, 241, 283 
Housing and Home Finance Agency, 
15 

Idaho Power Company, 306-308 

India, 333 

Indo-China War, 16-17 

Inflation, 8, 44, 62-63, 65, 83, 85-89, 
102-105, 107, 110-111, 114-115, 
123, 159-160, 331, 341; causes, 90- 
92; and fiscal policy, 145-147; in 
metals and service industries, 92; in 
wartime, 87-89 



Subject index 



377 



Interest rates, xviii, 65, 84, 95, 97-99, 
106, 109-110, 114-125; see also 
Debt management 
International Cooperation Administra- 
tion, 15 
International economics, 325-337 
International Monetary Fund, 332-333 
Investment, 92, 97-98, 121, 124, 153- 
154, 156-157, 194-195, 219-220 

Jeffersonianism, 4-5 
Joint Chiefs of Staff, 17, 170 
Joint Committee on the Economic Re- 
port, 147-148 
Joint Economic Committee, 205 
Josephs Committee, 243, 258 
Justice Department, 305 

Kansas, 39 

Kelley Education Bill, 261 

Kennedy Administration, achievements 

of first year, xxix-xxx, 66; legislative 

proposals, 69 
Keynesian economics, 212 
Keynesian revolution, xviii 
Korean War, 131, 133, 151 

Labor legislation, 47-49, 227 
Labor supply, 220 
Laissez faire, 7 
Landrum-Griffin Bill, 48 
Laos, 10 
Loans, 94, 97-98 

Marshall Plan, 10 

Massive retaliation policy, 172, 177 

Medical care for the aged, 66, 68, 191, 

252-253 
Medical research, 218-219, 243, 271 
Medicine, 31, 64, 241, 243, 264-273, 

292-293 
Minimum wage, 47, 66 
Missile gap, 17 
Missile program, 172, 177 
Monetary policy, 92-99, 113, 114, 116 
Money, 81-125 
Money supply, xix, 78, 87, 91, 94-95, 

98, 117, 164; expansion of, 100- 

105 
Mutual Security Act of 1955, 326 

National debt, 104-105, 131, 133, 141- 
142, 159-160, 166 



National Institute of Mental Health, 

'272 
National Labor Relations Board, 16, 

48-49 
National Planning Association, 150, 

175, 198, 214, 233 
National security, 136, 139-140, 150, 

349 
National Security Council, 177 
Natural Gas Bill, 311 
Natural resources, 67, 134, 298-299, 

303-313 
Negro vote, 73, 76, 78, 81 
New Deal, 4, 51, 181, 239 
New Frontier, xxxiii 
New York Times, 207, 261, 307, 310 

Old Age and Survivors Insurance, 142, 
188, 190, 220; 250-254, 347 

Open market operations, 83-84, 107, 
121, 163 

Paley Commission, 303, 312 

Party platforms, xxi-xxii, 62-69, 269, 
320, 341, 348 

Patronage, see Political appointments 

Payroll taxes, 155, 252, 254-255 

Personal income tax, 154 

Political appointments, xxii-xxiii; un- 
der Eisenhower, 20-24, 27-29; un- 
der Kennedy, 25-32; under Roose- 
velt, 23 

Political philosophy, Democratic, 13- 
14; Eisenhower, 3-9; Republican, 
9^13 

Population, 133, 267, 299, 303 

Post Office Department, 135, 143 

Powell Amendment, 261 

Prices, history of, 87-88; administered, 
92 

Price stability, xxiii, 43-45, 83, 110, 
116 

Private enterprise, 7, 12, 60, 137, 142, 
250, 272, 341, 346 

Productivity, 92, 123, 136, 182, 188, 
215, 217, 220, 253, 289, 331 

Profits, 37, 92, 110 

Protectionism, 325, 329, 335 

Protestant vote, 73 

Public assistance grants, 252 

Public utilities, 15 

Public works, 134 



378 

Pure Food and Drug Administration, 

271, 273 

Randall Committee, 326-327 

Recession, 1954, 146, 204; 1957-1958, 
110, 204-211, 216; 1960-1961, 111, 
211, 225 

Reciprocal trade agreement, 15, 325- 
327 

Rediscount rate, 83, 110 

Republican Party, Committee on Pro- 
grams and Progress, 214, 345; finan- 
cial and voting strength, xxiv; ideol- 
ogy, xviii, 7, 12-13, 83, 100, 103, 
113, 227, 343-344, 346; views on 
economic policy, xix-xxi, xxv-xxviii 

Research, 135, 169, 173, 219; see also 
Medical research 

Reserve requirements, 84, 107, 159, 
163, 209 

Road program, 142, 144, 241 

Rockefeller Report, 45, 198 

Roosevelt Administration, 8 

Rural development program, 316 

Russian air power, 18 

St. Louis Post-Dispatch, 307 

Sales tax, 155 

Salk vaccine, 11-12, 31, 64, 250, 272- 
273 

Savings, 95, 98, 194 

Second Bank of the United States, 
103 

Senate Foreign Relations Committee, 
66 

Senate Interior and Insular Affairs 
Committee, 306 

Series E bonds, 165 

Seward's Folly, 13-14 

Sherman Act, 56 

Small Business Administration, 21 

Small business problems, 36-38 

Social Security, 8, 23, 46, 209, 240, 
242, 245-248, 278; see also Disabil- 
ity insurance, Old Age and Survi- 
vors Insurance, Unemployment com- 
pensation 

Social Security Act, 240 

Socialism, 56 

Soil bank program, 64, 317, 319 

Sputnik, 262, 343 

Standard deduction, 196 



^t SUBJECT INDEX 

State and local government, 47, 53, 
133, 137, 145, 155, 240, 243-244, 
253-254, 257-258, 262, 285 

Stock ownership, 156 

Taft-Hartley Act, 48-49, 65 

Tariff Commission, 335 

Tax legislation of 1954, 63 

Tax loopholes, 153, 195 

Tax policy, 145-157, 194-196 

Ta* Revision Bill, 151-153, 155-156 

Teachers' salaries, 257 

Tennessee Valley Authority, 8, 39-40, 
55, 304-305, 329 

Textile industry, 335-337 

Tied loans, 332-333 

Time, 131 

Trade Agreements Extension Bill, 325, 
336-337 

Trade unionism, 91 

Transfers, 46, 210 

Treasury Department, 106-109, 114, 
121, 123, 183-194; and debt man- 
agement, 158-168 

Truman Administration, 18, 133, 143, 
144, 166 

Trust Funds, 144, 188, 190, 194 

Unemployment, xxxii-xxxiii, 17, 44, 88, 
102, 123, 179, 182, 186, 188-189, 
199, 210-211, 226-227, 229^235, 
286-289, 349; structural, 232-234; 
and votes, xix, 73-81 

Unemployment compensation, 18, 46, 
188, 191, 245-246, 274-280 

Urban redevelopment, xxxi, 250, 281- 
285 

U.S.S.R., 45, 176, 342-343; rate of 
economic growth, 213-214, 223 

Velocity of money, 95-96 
Vocational training, 230, 234-235 

Wages, xxxi, 46, 91, 116, 123, 223 

Water conservation problem, 55, 299- 
300 

Weather Bureau, 135 

Welfare programs, 239^300 

Westinghouse Electric Company, 37 

Whig tradition, xxix, 19, 344 

White House Conference on Educa- 
tion, 258 

White vote, 73 



NAME INDEX * 



Aandahl, Fred A., 15 

Acheson, Dean, 23 

Adams, Sherman, xxiv, xxvi, 17, 23, 

27, 40, 139, 177, 196, 305, 344 
Agar, Herbert, 19 
Aldrich, Winthrop, 23 
Alsop, Joseph and Stewart, 34 
Anderson, Clinton P., 10, 112, 163, 

165,311 
Anderson, Robert B., 11, 23, 30, 131, 
' 148, 184, 188, 203, 225, 227 

Baird, Julian B., 161, 166, 192 

Baker, Newton D., 31 

Baldwin, Hanson, 171, 173 

Barnes, Stanley Nelson, 36 

Beeson, Albert, 16 

Belcher, Donald Ray, 23 

Bell, David E., xxviii, 183-184 

Bell, Elliott V., 108, 112 

Bennett, Senator Wallace Foster, 209 

Benson, Ezra Taft, 12, 23, 31, 315- 

316, 319, 322 
Berle, Adolf, 23 
Bowles, Chester, 344 
Bronk, Detlev W., 272 
Brownell, Herbert, 21, 23, 32 
Brownell, Samuel M., 260 
Bryan, William Jennings, xxv, 104 
Bundy, McGeorge, 28 
Burgess, Randolph, xviii, 11, 23, 92, 

109, 138-139, 161, 163-165, 167 
Burns, Arthur, xx, 11-23, 99, 111-112, 

122-123, 130, 132, 204, 225 
Burns, James, 51 
Bush, Prescott, xxv, 12, 208, 300 
Bush, Vannevar, 34 
Butters, Keith, 151 
Byrd, Senator Harry, 56, 108, 144 

Cain, Harry, 17 
Chase, Stuart, 187 
Childs, Marquis, 9, 40, 111, 261 
Clague, Ewan, 91, 234 
Clark, Senator Joseph, 60, 190, 283, 
342 



184- 



130, 



149, 
286, 



Clay, 41 

Cole, Albert M., 15, 282 
Colm, Gerhard, 143, 150, 227 
Coolidge, T. Jefferson, 23 
Cooper, Richard, 139 
Cross, John S., 40 
Curtis, Charles, 254 
Curtis, Thomas, 121 
Cutler, Robert, 27, 41 

Dale, Edwin, xxvi, 119, 227 

D'Ewart, Wesley, 15 

Dillon, C. Douglas, xxxiii, 28-31, 

185, 192, 334 
Dodge, Joseph M, 23, 170 
Donovan, Robert J., 9-10, 40, 

155, 203, 307 
Dorfman, Ben, 335 
Douglas, Senator Paul, 60, 92, 

152-153, 192, 205-207, 275, 

308,311 
Drummond, Roscoe, 173-174, 272 
Dulles, Allen W., 45 
Dulles, John Foster, 17-18, 21, 23, 

173, 344 
du Pont family, 33 

Eastman, Joseph, 23 

Eccles, Marriner, 165 

Eckstein, Otto, 306 

Eisenhower, D wight D., xv-xviii, xxiv, 
xxvi, xxviii-xxxii, 3-23, 25, 35, 38, 
41, 43-44, 47, 49, 51, 53, 55-56, 58, 
60, 62, 65-66, 68, 73-74, 78, 84, 86, 
88, 90, 93, 96, 98, 100, 103-104, 
106-107, 111, 114, 120, 124. 129- 
133, 137, 139-145, 149, 151, 153- 

156, 158, 162, 164, 166, 169-170, 
173-174, 176-180, 184, 187-188, 
190-194, 196, 199, 203, 206, 208- 
209, 215-216, 218, 222, 225, 227, 
234-235, 240-243, 245-246, 249, 
251, 253, 258-263, 265, 269-276, 
278, 282-285, 288, 291-293, 295- 
298, 300, 303-305, 312-316, 319, 



* I am indebted to Marion A. Wilson and Richard E. Sylla for the index. 



379 



380 



^ 



NAME INDEX 



Eisenhower, Dwight D. ( Cont. ) : 
321-322, 325-329, 331, 334-335, 
344-345, 347-348 

Fanner, Guy, 16 

Fellner, William J., 102 

Finletter, Thomas K., 171, 174 

Fischer, John, 52 

Flanders, Ralph, 241 

Flemming, Arthur, 131, 249 

Fogler, Raymond H., 23' 

Folsom, Marion B., 21, 23, 27, 32, 41, 

262 
Forand, Aime Joseph, 252 
Francis, 272 
Freeman, Orville L., 31 
Fulbright, Senator James W., 154 
Fuller, Edgar, 260 

Galbraith, J. Kenneth, 28, 30, 152, 187 

Gardner, Trevor, 17 

Gass, Oscar, 185, 225 

Gates, Thomas S., 23, 27, 31 

Gladstone, William, 29 

Goldberg, Arthur J., 31 

Goldfine, Bernard, 40 

Goldsmith, R. W., 102 

Goldwater, Senator Barry, xvi, xix, 56- 

58, 61, 187, 300, 347 
Gore, Senator Albert, 33, 156 
Grant, Ulysses S., xxv 
Gwinn, Ralph W., 6 

Hamilton, Alexander, 31, 184 

Hanna, Mark, 9 

Hansen, Alvin H., 150, 187, 227 

Harding, Warren G., xxv, xxxiii, 4 

Harriman, W. Averell, 23 

Harris, Seymour, 310 

Harrison, William H., 344 

Harrod, Roy Forbes, 187 

Hauge, Gabriel, 11 

Hayes, Alfred, 120 

Heller, W. W., 143, 156, 181, 186 

Hill, Lister, 260 

Hobby, Oveta Culp, 11-12, 21, 23, 

31-32, 64, 250, 256, 259-260, 262, 

270, 272 
Hodges, Luther H., 31 
Hollings, Ernest F., 336 
Hollister, John B., 15 
Hoover, Herbert C., xxxiii, 6-9, 29, 31, 

43, 57, 101, 129, 155, 173, 184-185, 

192, 224, 258, 304, 316 



Hopkins, Harry, 23 

Hughes, Phillip S., 23, 39, 305 

Hull, Cordell, 23 

Humphrey, George M., xv-xvi, xxxiii, 
9-11, 16-18, 21, 23, 29-30, 43, 47, 
52, 90, 92, 96, 102, 104-105, 111, 
122, 130, 134-136, 139, 145, 148, 
154, 163, 170, 177, 184, 194, 196, 
203-205, 227, 254, 335, 344 

Humphrey, Hubert H., 60 

Huntington, Samuel, 173 

Ickes, Harold L., 23 

Jaszi, George, 46 

Jefferson, Thomas, 3, 5, 34, 258 

Johnson, Hugh, 23 

Kelso, Louis, xxi 

Kennedy, John F., xvi-xvii, xxi-xxiii, 
xxviii-xxix, xxxi-xxxiv, 16, 19, 25- 
29, 32, 48, 50-54, 60, 62, 66, 69, 
73, 78, 81, 115, 119-120, 124, 132, 
135, 157, 167, 178-183, 185, 187- 
188, 190-195, 197-199, 222-235, 
291-300, 319-322, 330-337 

Kennedy, Joseph, 23 

Kennedy, Robert F., 32 

Kerr, Senator Robert S., 167 

Keynes, John Maynard, 146-147, 150, 
187 

Keyserling, Leon, 59, 185-187 

King, Martin Luther, 73 

Knowland, William, 12, 205 

Krutilla, John V., 306 

Kuykendall, Jerome F., 15 

Larson, Arthur, 12-13 

Lester, Richard, 276 

Lilienthal, David E., 23 

Lippmann, Walter, xxxii, 171, 185- 

187, 207, 348 
Lodge, Henry Cabot, 32 
Lourie, Donald, 23 
Lytton, Henry D., 136 

McCarthy, Eugene, 276 

McCarthy, Joseph R., 17 

McConnell, James J., 15 

McElroy, Neil H., 31 

McKay, Douglas, 11, 21, 23, 32, 307- 

308, 310 
McKinley, William, 9, 57 
McNamara, Robert S., 28, 31 



Name index 



381 



Mansure, Edmund F., 40—41 

Martin, Joseph, 26, 92, 101, 111, 119- 

120, 123, 1$3, 205, 230, 232 
Mayo, Robert P., 161 
Mazo, Earl, 347 

Mellon, Andrew W., xxxii, 9, 33, 129 
Mill, John Stuart, xviii 
Miller, A. C, 101 
Mills, Wilbur D., 318 
Mitchell, George, 18, 31, 41, 120, 131 
Mitchell, James, 274-275 
Morgan, Arthur, 23 
Morgenthau, Henry, Jr., xxxiii, 23, 184 
Morse, True D., 317 
Moses, Robert, 250 
Mueller, Frederick H., 31 

Nevins, Allan, 52 

Neuberger, Senator Richard L., 266, 
308 

Neustadt, R. E., 52 

Nixon, Richard M., xviii-xix, xxi, xxv, 
xxxi, 39, 51, 53-56, 60-61, 66, 68, 
73, 75, 78, 81, 114-115, 122, 131, 
136, 178-180, 188, 195-197, 213, 
222-223, 225-228, 291-294, 300, 
319-322, 330, 334, 342, 347-348 

Oppenheimer, Robert, 34 

Patman, Wright, 111 

Peck, 23 

Pecora, Ferdinand, 23 

Perkins, Frances, 23 

Pew family, 33 

Pinchot, Gifford, 303 

Proxmire, Senator William, 187 

Pyle, Howard, 47 

Rand, 23 

Randall, Clarence, 35 

Rayburn, Sam, 15, 153 

Reston, James, 17 

Reuss, Henry, 7, 120, 167, 310 

Ribicoff, Abraham A., 31 

Ridgway, Matthew B., 17, 170-171, 

173 
Roberts, Wesley, 39 
Roche, Josephine, 23 
Rockefeller, Nelson, xix, 33-34, 56, 

58-61, 67-68, 78, 222, 341, 347- 

348 
Rogers, William P., 23, 27, 32, 131 



Roosevelt, Franklin D., xxii, xxxiii, 8, 
13, 16, 20, 22-23, 25-28, 50, 184, 
187, 240, 294, 303, 316, 321 

Roosevelt, Theodore, 6, 303 

Roper, Elmo, 81 

Rose, H. C., 23 

Rovere, Richard, 28 

Rusk, Dean, 29 

Rusk, Howard A., 218, 265, 268 

Samuelson, Paul, 30, 116, 181, 187, 

225 
Sarena, Al, 41 
Saulnier, R. J., 342 
Schaeffer, 23 

Schlesinger, Arthur M., Jr., 28, 30 
Sears, Paul B., 308 
Seaton, Frederick A., 23, 32, 131 
Siegal, Isadore, 35 
Slichter, Sumner, 207 
Smith, Adam, 13 
Smith, Bedell, xxii, 26 
Smith, Margaret Chase, 218 
Smith, Warren, 192 
Snyder, John W., xxxiii 
Sorenson, Theodore, 28 
Sparkman, Senator John, 242, 285, 

318 
Spencer, Herbert, 29, 57 
Sprague, O. M. W., 23 
Sproul, Allan, 110 
Stans, Maurice, xvi-xvii, 131, 179, 

210-211 
Stein, Herbert, xxiv, 181 
Steinhart, Laurence, 23 
Stevens, Robert, 23 
Stevenson, Adlai, xvi, 13-14, 19, 32, 

34, 43, 73, 86, 132, 135, 149, 152, 

165, 174, 247, 253, 263, 306, 311- 

312, 325, 348 
Stimson, Henry L., 31 
Straus, Jesse, 23 

Taber, John, 240 

Taft, Robert A., 6, 8, 15, 173, 258-259 

Talbott, Harold E., 39, 41 

Thomas, Woodlief, 204 

Tobin, James, 116 

Toynbee, Arnold J., 247 

Truman, Harry S., xxii, xxx-xxxi, 7, 16, 
26-27, 35, 55, 89, 108, 112, 115, 
133-134, 140, 143-145, 150, 166, 
169, 175, 206, 215, 222-223, 292 

Tugwell, Rexford G., 23 



382 

Udall, Stewart L., 32 

Vandenberg, Arthur H., 8 
Vernon, Raymond, 281 

Wallace, Henry A., 23 
Warren, Charles, 23 
Washington, George, 258 
Weeks, Sinclair, 9, 21, 31, 35 
Wells, H. G., 248 



^f NAME INDEX 

Wenzell, Adolph, 39, 305 

White, Gilbert, 313 

White, Theodore, xxiv, 68, 73, 348 

Wiesner, Jerome B., 28 

Williams, S. Clay, 23 

Wilson, Charles E., xxix, 9, 18, 21, 31, 

48, 170-173 
Wilson, Woodrow, 4, 13, 14 
Woodin, William, 23 



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